PART I
ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
Not Applicable.
ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE
Not Applicable.
ITEM 3. KEY INFORMATION
3A. SELECTED FINANCIAL DATA
The following selected financial data as of December 31, 2006 and 2007 and
for each of the three years ended December 31, 2005, 2006 and 2007 have been
derived from, and should be read in conjunction with, our consolidated financial
statements and notes thereto appearing elsewhere in this Annual Report. The
selected financial data as of December 31, 2003, 2004, and 2005 and for each of
the years ended December 31, 2003 and December 31, 2004 have been derived from
our audited financial statements not included in this Annual Report.
We sold our ownership interest in AlbaHealth in April 2006. Accordingly,
the financial statements of AlbaHealth are accounted for as discontinued
operations, and the financial results and information described below do not
include the financial results of AlbaHealth. We ceased to consolidate the
financial statements of AlbaHealth commencing April 27, 2006.
FOR THE YEAR ENDED DECEMBER 31
-------------------------------------------------------------------------------
2003 2004 2005 2006 2007
------------ ------------ ------------ ------------ ------------
U.S. dollars in thousands (except per share data)
STATEMENT OF INCOME DATA:
Sales $ 124,800 $ 148,620 $ 171,336 $ 188,104 $ 158,614
Cost of sales 113,622 136,424 141,621 145,144 139,147
Gross profit 11,178 12,196 29,715 42,960 19,467
Selling, and marketing expenses 9,285 11,309 8,984 11,573 12,443
General and administrative expenses 5,017 5,603 4,595 5,504 5,272
Operating income (loss) (3,124) (4,716) 16,136 25,883 1,752
Financing expenses, net 4,019 3,888 3,189 1,912 1,289
Income (loss) before taxes on income (7,143) (8,604) 12,947 23,971 463
Taxes on income (tax benefit) (616) 83 4,297 5,711 (20)
Equity in earnings of affiliated companies (183) - - - -
Pre-acquisition earnings of subsidiary
since April 1, 2003 through May 5, 2003 (85) - - - -
Income (loss) from continuing operations (6,795) (8,687) 8,650 18,260 483
Income (loss) from discontinued operations 2,342 1,822 (5,357) 120 -
------------ ------------ ------------ ------------ ------------
Net income (loss) $ (4,453) $ (6,865) $ 3,293 $ 18,380 $ 483
Basic and diluted net earnings (losses)
per share from continuing operations:
Basic net earnings (losses) per share (0.55) (0.56) 0.49 0.90 0.02
============ ============ ============ ============ ============
Diluted net earnings (losses) per share (0.55) (0.56) 0.47 0.88 0.02
------------ ------------ ------------ ------------ ------------
Basic and diluted net earnings (loss) per
share from discontinued operations:
Basic net earnings (losses) per share 0.19 0.12 (0.30) 0.01 -
------------ ------------ ------------ ------------ ------------
Diluted net earnings (losses) per share 0.19 0.12 (0.29) 0.01 -
------------ ------------ ------------ ------------ ------------
Basic and diluted net earnings (loss) per
share:
Basic net earnings (losses) per share (0.36) (0.44) 0.19 0.91 0.02
------------ ------------ ------------ ------------ ------------
Diluted net earnings (losses) per share (0.36) (0.44) 0.18 0.89 0.02
------------ ------------ ------------ ------------ ------------
Weighted average number of shares used for
computing basic earnings (losses) per
share 12,412,166 15,603,904 17,719,275 20,210,722 21,188,161
------------ ------------ ------------ ------------ ------------
Weighted average number of shares used for
computing diluted earnings (losses)
per share 12,412,166 15,603,904 18,542,618 20,754,566 21,630,124
============ ============ ============ ============ ============
3
AT DECEMBER 31,
---------------------------------------------------------------------------
2003 2004 2005 2006* 2007
--------- --------- --------- --------- ---------
(in thousands)
Cash and cash equivalents $ 3,784 $ 2,462 $ 7,652 $ 3,966 $ 2,384
Working capital (deficit) (14,944) (8,524) 7,296 35,270 37,826
Total assets 201,591 191,531 186,514 164,656 162,492
Total debt(1) 84,224 66,507 56,621 25,270 19,322
Shareholders' equity 36,655 46,744 54,685 82,230 88,536
Share Capital 5,575 6,582 6,810 7,411 7,518
Additional paid in capital 62,810 79,243 83,069 101,684 106,530
- ----------
(1) Bank consists of total bank debt, other loans received and capital
lease obligations.
* In 2006, dividends declared per share amounted to $0.4851. No dividends
were declared in the years 2003 - 2005 and 2007.
3B. CAPITALIZATION AND INDEBTEDNESS
Not Applicable.
3C. REASONS FOR THE OFFER AND USE OF PROCEEDS
Not Applicable.
3D. RISK FACTORS
WE DEPEND ON A SMALL NUMBER OF PRINCIPAL CUSTOMERS WHO HAVE IN THE
PAST BOUGHT OUR PRODUCTS IN LARGE VOLUMES. WE CANNOT ASSURE THAT THESE
CUSTOMERS OR ANY OTHER CUSTOMER WILL CONTINUE TO BUY OUR PRODUCTS IN THE
SAME VOLUMES OR ON THE SAME TERMS.
Our sales to Victoria's Secret accounted for approximately 40.3% of our
total sales in 2005, 38.6% of our total sales in 2006 and 39.1% of our total
sales in 2007. Our sales to Nike accounted for approximately 25.8% of our total
sales in 2005, 28.8% of our total sales in 2006 and 23.6% of our total sales in
2007. Our sales to Target, J.C. Penney, Swimwear Anywhere and The Gap accounted
in the aggregate for approximately 19.1% of our total sales in 2005, 21.4% of
our total sales in 2006 and 20.7% of our total sales in 2007. We do not have
long-term purchase contracts with our customers, and our sales arrangements with
our customers do not have minimum purchase requirements. We cannot assure that
Victoria's Secret, Nike, Target, J.C. Penney, Swimwear Anywhere and The Gap or
any other customer will continue to buy our products at all or in the same
volumes or on the same terms as they have in the past. Their failure to do so
may significantly reduce our sales. In addition, we cannot assure that we will
be able to attract new customers. For comparison purposes, all data provided
above excludes Alba Health, in which we sold our ownership in April, 2006.
4
A material decrease in the quantity of sales made to our principal
customers, a material adverse change in the terms of such sales or a material
adverse change in the financial conditions of our principal customers could
significantly reduce our sales.
OUR BUSINESS MAY BE MATERIALLY AFFECTED IF ANY OF OUR PRINCIPAL
CUSTOMERS DEFAULTS ON ITS PAYMENT TO US.
A significant part of our sales is made to a limited number of customers.
Our two largest customers accounted for 62.7% of our sales in 2007, and our six
largest customers accounted for approximately 83.5% of our sales in 2007. We
generally do not require and do not receive collateral from those customers. We
maintain an allowance for doubtful debts based upon factors surrounding the
credit risk of specific customers, historical trends and other information which
our management believes adequately covers all anticipated losses in respect of
trade receivables. There can be no assurance that this allowance will be
adequate. In the event that any of our major clients defaults on its payment
obligations to us, this could have a material adverse effect on our operating
results.
OUR PRINCIPAL CUSTOMERS ARE IN THE CLOTHING RETAIL INDUSTRY, WHICH IS
SUBJECT TO SUBSTANTIAL CYCLICAL VARIATIONS. OUR REVENUES WILL DECLINE
SIGNIFICANTLY IF OUR PRINCIPAL CUSTOMERS DO NOT CONTINUE TO BUY OUR
PRODUCTS IN LARGE VOLUMES DUE TO AN ECONOMIC DOWNTURN.
Our customers are in the clothing retail industry, which is subject to
substantial cyclical variations and is affected strongly by any downturn or
slowdown in the general economy. A downturn or a slowdown in the general
economy, or in the U.S. economy in particular, a change in consumer purchasing
habits or any other events or uncertainties that discourage consumers from
spending, could have a significant effect on our customers' sales and
profitability. Such downturns, changes, events or uncertainties could result
also in our customers having larger inventories of our products than expected.
These events could result in decreased purchase orders from us in the future,
which would significantly reduce our sales and profitability. For example, the
difficult global economic environment and the continuing soft retail market
conditions in the world and specifically in the U.S. both before and especially
after the events of September 11, 2001 were reflected in disappointing clothing
retail sales in the year 2001 compared to the same period in the year 2000, and
consequently decreased our order backlog and production levels. A prolonged
economic downturn could harm our financial condition.
THE CLOTHING RETAIL INDUSTRY IS SUBJECT TO CHANGES IN FASHION
PREFERENCES. IF WE OR OUR CUSTOMERS MISJUDGE A FASHION TREND OR THE PRICE
WHICH CONSUMERS ARE WILLING TO PAY FOR OUR PRODUCTS, OUR REVENUES COULD BE
ADVERSELY AFFECTED.
The clothing retail industry is subject to changes in fashion preferences.
We design and manufacture products based on our and our customers' judgment as
to what products will appeal to consumers and what price consumers would be
willing to pay for our products. We may not be successful in accurately
anticipating consumer preferences and the prices that consumers would be willing
to pay for our products. If we are not successful, our customers may reduce the
volume of their purchases from us and/or the prices at which we sell our
products will decline, in either case resulting in reduced revenues.
5
OUR MARKETS ARE HIGHLY COMPETITIVE AND SOME OF OUR COMPETITORS HAVE
NUMEROUS ADVANTAGES OVER US; WE MAY NOT BE ABLE TO COMPETE SUCCESSFULLY.
We compete directly with a number of manufacturers of intimate apparel,
active-wear and swimwear, many of which have a lower cost-base than Tefron,
longer operating histories, larger customer bases, greater geographical
proximity to customers and significantly greater financial and marketing
resources than we do. Increased competition, direct or indirect, could reduce
our revenues and profitability through pricing pressure, loss of market share
and other factors. We cannot assure that we will be able to compete successfully
against existing or new competitors, as the market for our products evolves and
the level of competition increases. Moreover, our competitors, especially those
from the Far East, have established relationships with our customers, which has
caused an erosion of prices of some of the products of our Cut & Sew Division,
and we expect this will have a negative effect on our sales of Cut & Sew
products. In particular, our largest intimate apparel customer has informed us
that it intends to gradually transfer its sourcing of an old Cut & Sew cotton
program to India beginning in the second half of 2008. Current or future
relationships between our existing and prospective competitors, especially from
the Far East, with existing or potential customers, could materially affect our
ability to compete. In addition, we cannot assure that our customers will not
seek to manufacture our products through alternative sources, including directly
with our subcontractors, and thereby eliminate the need to purchase our
products. See "Item 4. Information on the Company - 4B. Business Overview -
Competition."
Our customers operate in an intensely competitive retail environment. In
the event that any of our customers' sales decline for any reason, whether or
not related to us or to our products, our sales to such customers could be
materially reduced.
In addition, our competitors may be able to purchase seamless knitting
machines and other equipment similar to, but less expensive than, the Santoni
knitting machines we use to knit garments in our Hi-Tex manufacturing process.
By reducing their production cost, our competitors may lower their selling
prices. If we are forced to reduce our prices and we cannot reduce our
production costs, it will cause a reduction in our profitability. Furthermore,
if there is a weak retail market or a downturn in the general economy,
competitors may be pressured to sell their inventory at substantially depressed
prices. A surplus of intimate apparel at significantly reduced prices in the
marketplace would significantly reduce our sales.
OUR EXPANSION INTO NEW PRODUCT LINES WITH COMPLICATED PRODUCTS AND
DIFFERENT RAW MATERIALS, FACING SHORTER PRODUCTION RUNS, REDUCED OUR
OPERATING EFFICIENCY DURING 2007, AND WE MAY ALSO FACE OPERATING EFFICIENCY
DIFFICULTIES IN THE FUTURE.
In recent years, we have invested significant efforts to develop and expand
new product lines, including active-wear products and swimwear, to diversify our
product line and our client base. Our efforts to fulfill our costumers' needs,
including by providing innovative products, and the requirements of our
customers to manufacture new, complicated products with different raw materials
in shorter production runs, led to a reduction in our operating efficiency in
2007. Our continued efforts to develop and present new product lines and to make
the required adjustments to changes in market trends may result in additional
reductions in operating efficiency and profits in the future. As a result of our
reductions in operating efficiency, we may also be unable to meet our customers'
delivery deadline requirements, which may adversely affect our relationships
with our customers and also increase our costs due to the additional freight
charges and penalties that we may be required to pay.
OUR BUSINESS MAY BE IMPACTED BY INFLATION AND U.S. DOLLAR, NIS AND
EURO EXCHANGE RATE FLUCTUATIONS AS WELL AS THE EXCHANGE RATES OF THE OTHER
CURRENCIES IN COUNTRIES IN WHICH WE OPERATE.
Exchange rate fluctuations between the U.S. dollar and the NIS and between
the Euro and the U.S. dollar, and inflation in Israel, may negatively affect our
earnings. A substantial majority of our revenues and a substantial portion of
our expenses are denominated in U.S. dollars and a portion of our revenues is
denominated in Euros. However, a significant portion of the expenses associated
with our Israeli operations, including personnel and facilities-related
expenses, are incurred in NIS. A significant portion of our expenses are also
incurred in countries in the Far East, mainly China and India; these expenses
are denominated in U.S. dollars but may be adjusted in accordance with the
exchange rate of the local currency to the U.S. dollar. Consequently, we are
exposed to the risk of appreciation of the NIS and other currencies vis-a-vis
the U.S. dollar. This appreciation would cause, and in 2007 did cause, an
increase in our expenses as recorded in our U.S. dollar denominated financial
reports even though the expenses denominated in local currencies will remain
unchanged.
6
Due to the appreciation of the NIS vis-a-vis the dollar in 2007, we
incurred gross expenses of approximately $1.0 million in 2007. This amount does
not take into account hedging transactions performed by the Company during 2007,
which diminished the adverse effect of the appreciation of the NIS in relation
to the dollar. This appreciation may continue in 2008. Since December 31, 2007,
the U.S. dollar has continued its devaluation vis-a-vis the NIS. As of March 17,
2008, the representative exchange rate between the NIS and the U.S. dollar as
published by the Bank of Israel was NIS 3.426 to $1, as opposed to NIS 3.846 to
$1 as of December 31, 2007.
In addition, inflation in Israel and all other off-shore locations in which
we operate will have the effect of increasing the dollar cost of our operations
in Israel, unless it is offset on a timely basis by a devaluation of the NIS
relative to the U.S. dollar. We cannot predict any future trends in the rate of
inflation in Israel or the rate of devaluation of the NIS against the U.S.
dollar. In addition, fluctuations in currency exchange rates in countries other
than Israel where we operate and do business may also negatively affect our
earnings. See "Item 11. Quantitative and Qualitative Disclosures about Market
Risk - Foreign Currency Risk."
WE FACE SEVERAL RISKS, INCLUDING POLITICAL, ECONOMIC AND SOCIAL RISKS,
ASSOCIATED WITH INTERNATIONAL BUSINESS.
Approximately 90% of our sales in 2005, 77% of our sales in 2006 and 84% of
our sales in 2007 were made to customers in North America, and approximately 18%
of our sales during 2006 and 11% of our sales during 2007 were made to customers
in Europe. We also had initial sales to Asia constituting approximately 2% of
our sales in 2006 and in 2007. We intend to continue to expand our sales to
customers in the United States and Europe. In addition, a substantial majority
of our raw materials are purchased outside of Israel. Furthermore, a substantial
majority of our sewing operation is performed in Jordan, China, India and
Cambodia. For these purposes, products of ours are situated in these countries,
and equipment and machinery of ours are situated in Jordan. Our international
sales and purchases are affected by costs associated with shipping goods and
risks inherent in doing business in international markets, including:
o changes in regulatory requirements;
o export restrictions, tariffs and other trade barriers;
o quotas imposed by international agreements between the United States
and certain foreign countries;
o currency fluctuations;
o longer payment cycles;
o difficulties in collecting accounts receivable;
o political instability, hostility and seasonal reductions in business
activities;
o strikes and general economic problems; and
o costs associated with deliveries, including thefts, delays and losses
of products in transit, which are not totally covered by insurance
policies.
Any of these risks could have a material adverse effect on our ability to
deliver or receive goods on a competitive and timely basis and on our results of
operations. We cannot assure that we will not encounter significant difficulties
in connection with the sale or procurement of goods in international markets in
the future or that one or more of these factors will not significantly reduce
our sales and profitability. See "Item 4. Information on the Company - 4B.
Business Overview - Manufacturing and Production."
7
In addition, we may enter into joint ventures with third parties or
establish operations outside of Israel that will subject us to additional
operating risks. These risks may include diversion of management time and
resources and the loss of management control over such operations and may
subject us to the laws of such jurisdiction. For instance, due to commercial
disputes that arose between us and the other shareholder of our subsidiary that
managed operations in Madagascar, we no longer have production activities in
Madagascar.
In addition to our production facilities in Israel, we currently have
production facilities in Jordan, we have relationships with manufacturers in
India, China and Cambodia, and we are in the process of shifting additional
production activities, mainly dyeing, cutting and sewing, finishing and
accompanied operations and logistics operations, out of Israel to benefit from
lower labor costs.
Our ability to benefit from the lower labor costs will depend on the
political, social and economic stability of these countries and in the Middle
East and Asia in general. We cannot assure that the political, economic or
social situation in these countries or in the Middle East and Asia in general
will not have a material adverse effect on our operations, especially in light
of the potential for hostilities in the Middle East. The success of the
production facilities also will depend on the quality of the workmanship of
laborers and our ability to maintain good relations with such laborers in these
countries. We cannot guarantee that our operations in China, Cambodia, India,
Jordan or any newer locations outside of Israel will be cost-efficient or
successful.
OUR EXPANSION INTO NEW PRODUCT LINES, IN PARTICULAR ACTIVE-WEAR
BUSINESS PRODUCTS, INVOLVES THE MANUFACTURE OF NEW PRODUCTS, WHICH HAS AND
MAY REQUIRE US TO PURCHASE ADDITIONAL MACHINERY ADAPTED TO MANUFACTURE SUCH
PRODUCTS. THE ADDITIONAL CAPITAL EXPENDITURES INCURRED IN CONNECTION WITH
THESE PURCHASES MAY REDUCE OUR FUTURE CASH FLOW.
In recent years, we have invested significant efforts to develop and expand
our new product lines, in particular active-wear products, to diversify our
product line and our client base. Active-wear products that we manufacture are
made in bigger sizes than intimate apparel, both because our active-wear
products are intended for both men and women, and because our active-wear
products involve the manufacture of more tops. As a result, we have purchased
and may need to purchase additional knitting machines and other equipment
adapted to manufacture new products. In addition, the manufacture of active-wear
products at times requires equipment with new technologies. We may also have to
purchase machinery to support the shorter production runs for our products. The
additional capital expenditures that may be incurred in connection with these
purchases may reduce our future cash flow.
WE DEPEND ON OUR SUPPLIERS FOR MACHINERY AND THEIR MAINTENANCE. WE MAY
EXPERIENCE DELAYS OR ADDITIONAL COSTS SATISFYING OUR PRODUCTION
REQUIREMENTS DUE TO OUR RELIANCE ON THESE SUPPLIERS.
We purchase machinery and equipment used in our Hi-Tex manufacturing
process from a sole supplier. If our supplier is not able to provide us with
maintenance, additional machinery or equipment as needed, we might not be able
to maintain or increase our production to meet any demand for our products.
OUR RESULTS OF OPERATIONS WOULD BE MATERIALLY AND ADVERSELY AFFECTED
IN THE EVENT WE ARE UNABLE TO OPERATE OUR PRINCIPAL PRODUCTION FACILITIES
IN SEGEV, ISRAEL.
All of our knitting process with respect to our Seamless Division, which
includes the major portion of our manufacture of our active-wear products, is
performed in a complex of production facilities located in Segev, which is in
northern Israel. These facilities also contain a significant portion of our
machinery and equipment, including Santoni machines and adaptations and
configurations that we have made to the machinery and equipment, as well as
infrastructure that we have built tailored to our needs. We have no effective
back-up for these operations and, in the event that we are unable to use the
production facilities located in Segev, Israel as a result of damage or for any
other reason, our ability to manufacture a major portion of our products and our
relationships with customers could be significantly impaired and this would
materially and adversely affect our results of operation. For instance, during
the third quarter of 2006, our revenues and results of operations were affected
by the loss of production due to hostilities in the northern part of Israel, and
there is the risk that further hostilities would also impact our production in
the future, leading to a reduction in revenues.
8
WE ARE SUBJECT TO FLUCTUATING COSTS OF RAW MATERIALS.
We use cotton yarn, spandex, various polymeric yarn and elastic as primary
materials for manufacturing our products. Our financial performance depends, to
a substantial extent, on the cost and availability of these raw materials. The
capacity, supply and demand for such raw materials are subject to cyclical and
other market factors and may fluctuate significantly. As a result, our cost in
securing raw materials is subject to substantial increases and decreases over
which we have no control except by seeking to time our purchases of cotton and
polymeric yarns, which are our principal raw materials, to take advantage of
favorable market conditions. For example, in 2007, the cost of synthetic fibers
increased due to rising energy costs, and there may be a similar increase in the
future. In addition, cotton price levels are currently very high due to high
demand and shortage of commodity. We cannot assure that we will be able to pass
on to customers the increased costs associated with the procurement of raw
materials. Moreover, there has in the past been, and there may in the future be,
a time lag between the incurrence of such increased costs and the transfer of
such increases to customers. To the extent that increases in the cost of raw
materials cannot be passed on to customers or there is a delay in passing on the
increased costs to customers, we are likely to experience an increase in the
cost of raw materials which may materially reduce our margin of profitability.
WE DEPEND ON SUBCONTRACTORS IN CONNECTION WITH OUR MANUFACTURING
PROCESS, IN PARTICULAR THE SEWING, DYEING AND FINISHING PROCESS; WE MAY
EXPERIENCE DELAYS OR ADDITIONAL COSTS SATISFYING OUR PRODUCTION
REQUIREMENTS AND WE MAY BE PREVENTED FROM MEETING OUR CUSTOMERS' ORDERS DUE
TO OUR RELIANCE ON THESE SUBCONTRACTORS.
We depend on subcontractors who render services to us that are an integral
part of our manufacturing process, and in particular sewing services. We also
depend on subcontractors for full vertical manufacturing services of our
swimwear products, and we are increasingly dependent on subcontractors' services
for all of our Cut & Sew products. If such subcontractors do not render the
required services, we may experience delays or additional costs to satisfy our
production requirements. We depend on a subcontractor who performs a major part
of the dyeing and finishing of our Hi-Tex manufacturing process, which is an
essential part of our manufacturing process. If that subcontractor breaches its
commitments toward us or is otherwise not able to supply the required services,
we would have difficulty meeting our customer orders until we find an
alternative source.
AN INCREASE IN THE MINIMUM WAGE IN ISRAEL OR IN JORDAN MAY ADVERSELY
AFFECT OUR OPERATING RESULTS.
Many of our employees earn the minimum wage payable under law. The current
minimum monthly wage in Israel is approximately NIS 3,710 and in Jordan is
approximately JD 110. Pursuant to existing legislation in Israel, the minimum
wage is to be increased effective as of July 1, 2008, to NIS 3,850. In addition,
a special committee was scheduled to submit by July 1, 2007 recommendations to
further increase the minimum wage, although we are not aware that any
recommendations were in fact submitted. An increase in the minimum wage would
increase our labor costs, and unless we can obtain alternative labor in lower
cost markets, this increase could adversely affect our operating results.
9
WE REQUIRE A SIGNIFICANT AMOUNT OF CASH TO SATISFY OUR DEBT
OBLIGATIONS. IF WE FAIL TO GENERATE SUFFICIENT CASH FLOW FROM OPERATIONS,
WE MAY NEED TO RENEGOTIATE OR REFINANCE OUR DEBT, OBTAIN ADDITIONAL
FINANCING, POSTPONE CAPITAL EXPENDITURES OR SELL ASSETS.
We depend mainly on our cash generated by continuing operating activities
to make payments on our debts. The cash generated by operating activities was
approximately $27.8 million and $3.0 million in 2006 and 2007, respectively. We
cannot assure that we will generate sufficient cash flow from operations to make
the scheduled payments on our debt. We have repayment obligations on our
long-term debt of approximately $5.9 in 2008 and the balance of $13.4 million
from 2009 until 2012. Our ability to meet our debt obligations will depend on
whether we can successfully implement our strategy, as well as on economic,
financial, competitive and technical factors. Some of the factors are beyond our
control, such as economic conditions in the markets where we operate or intend
to operate, changes in our customers' demand for our products, and pressure from
existing and new competitors.
If we cannot generate sufficient cash flow from operations to make
scheduled payments on our debt obligations, we may need to renegotiate the terms
of our debt, refinance our debt, obtain additional financing, delay planned
capital expenditures or sell assets.
If our lenders decline to renegotiate the terms of our debt in these
circumstances, the lenders could declare all amounts borrowed and all amounts
due to them under the agreements due and payable. If we are unable to repay the
debt in these circumstances, the lenders could foreclose on our assets that are
subject to liens and sell our assets to satisfy the debt. See "Item 5. Operating
and Financial Review and Prospects" and "Item 10. Additional Information -10C
Material Contracts - Credit Agreement."
OUR DEBT OBLIGATIONS MAY HINDER OUR GROWTH AND PUT US AT A COMPETITIVE
DISADVANTAGE.
As of December 31, 2007, we had approximately $19.3 million of long term
loans outstanding (including current maturities of $5.9 million). Our debt
obligations could have important consequences. For example, they could:
o require us to use a substantial portion of our operating cash flow to
repay the principal and interest on our loans, which would reduce
funds available to grow and expand our business, invest in machinery
and equipment and for other purposes;
o place us at a competitive disadvantage compared to our competitors
that have less debt;
o make us more vulnerable to economic and industry downturns and reduce
our flexibility in responding to changing business and economic
conditions;
o limit our ability to pursue business opportunities; and
o limit our ability to borrow money for operations or capital in the
future.
Because our loans bear interest at floating rates, an increase in interest
rates could reduce our profitability. For example, a ten percent change on our
floating interest rate long-term loans outstanding at December 31, 2007 would
have an annual impact of approximately $0.1 million on our interest cost. See
"Item 5. Operating and Financial Review and Prospects - Liquidity and Capital
Resources" and "Item 11. Quantitative and Qualitative Disclosures about Market
Risk."
DUE TO RESTRICTIONS IN OUR LOAN AGREEMENTS, WE MAY NOT BE ABLE TO
OPERATE OUR BUSINESS AS WE DESIRE.
Our loan agreements contain a number of conditions and limitations on the
way in which we can operate our business, including limitations on our ability
to raise debt, sell or acquire assets and pay dividends. Our loan agreements
also contain various covenants which require that we maintain certain financial
ratios related to shareholder's equity and operating results. These limitations
and covenants may force us to pursue less than optimal business strategies or
forgo business arrangements which could have been financially advantageous to us
and our shareholders. See "Item 5. Operating and Financial Review and Prospects
- - Liquidity and Capital Resources." Our failure to comply with the covenants and
restrictions contained in our loan agreements could lead to a default under the
terms of these agreements.
10
If a default occurs and we are unable to renegotiate the terms of our debt,
the lenders could declare all amounts borrowed and all amounts due to them under
the agreements due and payable. If we are unable to repay the debt, the lenders
could foreclose on our assets that are subject to liens and sell our assets to
satisfy the debt. See "Item 10. Additional Information - 10C. Material Contracts
- - Credit Agreement."
WE ARE AFFECTED BY CONDITIONS TO, AND POSSIBLE REDUCTION OF,
GOVERNMENT PROGRAMS AND TAX BENEFITS.
We benefit from certain Israeli government programs and tax benefits,
particularly as a result of the "Approved Enterprise" status of substantially
all of our existing production facilities in Israel. As a result of our
"Approved Enterprise" status, we have been able to receive significant
investment grants with respect to our capital expenditures. In addition,
following our exhaustion of our net operating loss carry forwards, we have been
able to benefit from a reduced tax rate of 25% on earnings derived from these
investments for which the benefit period has not expired. To maintain
eligibility for these programs and tax benefits, we must continue to meet
certain conditions, including making certain specified investments in fixed
assets and conducting our operations in specified "Approved Enterprise" zones in
Israel. If we fail to meet such conditions in the future, we could be required
to refund tax benefits and grants already received, in whole or in part, with
interest linked to the Consumer Price Index, or CPI, in Israel from the date of
receipt. We have granted a security interest over all of our assets to secure
our obligations to fulfill these conditions.
The Government of Israel has reduced the available amount of investment
grants from up to 38% of eligible capital expenditures in 1996 to up to 24% of
eligible capital expenditures (for projects not exceeding investments of NIS 140
million that are submitted in any year) and up to 20% of eligible capital
expenditures (for projects exceeding investments of NIS 140 million that are
submitted in any year) since 1997. There can be no assurance that the Israeli
government will not further reduce the availability of investment grants, and
there can be no assurance that there will be any government budget for such
grants. The termination or reduction of certain programs and tax benefits,
particularly benefits available to us as a result of the "Approved Enterprise"
status of some of our existing facilities in Israel, would increase the costs of
acquiring machinery and equipment for our production facilities and increase our
effective tax rate which, in the aggregate, could significantly reduce our
profitability. In addition, income attributed to certain programs is tax exempt
for a period of two years and is subject to a reduced corporate tax rate of 10%
- - 25% for an additional period of five to eight years, based on the percentage
of foreign investment in the Company. We cannot assure that we will obtain
approval for additional Approved Enterprises, or that the provisions of the Law
for the Encouragement of Capital Investments, 1959, as amended, will not change
or that the 25% foreign investment percentage will be reached for any subsequent
year. See "Item 4. Information on the Company - 4B. Business Overview - Israeli
Investment Grants and Tax Incentives."
We also benefit from exemptions from customs duties and import quotas due
to our locations in Israel and Jordan (Qualified Industrial Zone), and the free
trade agreements Israel maintains with the United States, Canada, the European
Union, or EU, and the European Free Trade Association, or EFTA. If there is a
change in such benefits or if any such agreements were terminated, our
profitability may be reduced. Recently, there has been a worldwide trend to
reduce quotas and customs in order to promote free trade. If other countries
enter into similar free trade agreements and obtain similar benefits, the price
of apparel products, including our products, may decline and our profitability
may be reduced.
11
OUR ANNUAL AND QUARTERLY OPERATING RESULTS MAY VARY WHICH MAY CAUSE
THE MARKET PRICE OF OUR ORDINARY SHARES TO DECLINE.
We may experience significant fluctuations in our annual and quarterly
operating results which may be caused by, among other factors:
o the timing, size and composition of orders from customers;
o varying levels of market acceptance of our products;
o the timing of new product introductions by us, our customers or their
competitors;
o economic conditions in the geographical areas in which we operate or
sell products; and
o operating efficiencies.
When we establish a relationship with a new customer, initial sales to such
customer are often in larger quantities of goods (to build its initial
inventory) and we may be required to replenish such inventory from time to time
afterwards. As a result, after a customer builds its initial inventory, our
sales to such customer may decrease. We cannot assure that our sales to any of
our customers will continue at the current rate. See "Item 5. Operating and
Financial Review and Prospects."
Our operations are affected by our principal customers' businesses, which
businesses are subject to substantial cyclical variations. If demand for our
products is significantly reduced, our profits will be reduced, and we may
experience slower production, lower plant and equipment utilization and lower
fixed operating cost absorption.
Additionally, if, in any year, there is a significant number of Christian,
Druse, Jewish or Muslim holidays in a particular quarter, we will have fewer
days of operation which will result in lower levels of production and sales
during such quarter. In certain years, a significant number of such holidays
have occurred during the second quarter, but the dates of many of those holidays
are based on the lunar calendar and vary from year to year.
IF OUR ORDINARY SHARES ARE DELISTED FROM THE NEW YORK STOCK EXCHANGE
AND/OR THE TEL-AVIV STOCK EXCHANGE, THE LIQUIDITY AND PRICE OF OUR ORDINARY
SHARES AND OUR ABILITY TO ISSUE ADDITIONAL SECURITIES MAY BE SIGNIFICANTLY
REDUCED.
In order to maintain the listing of our Ordinary Shares on the NYSE and the
TASE (where our Ordinary Shares began trading on September 28, 2005), we are
required to meet specified maintenance standards. In addition, the NYSE has
amended its continued listing criteria to require, among other things, either a
minimum stockholders' equity of $75 million or a minimum market capitalization
of $75 million. As of March 15, 2008, our market capitalization was $76.1
million, and as of December 31, 2007, we had shareholders' equity of $88.5
million.
In the event we fail to meet any current or revised listing criteria of the
NYSE or the TASE, our Ordinary Shares may be delisted from trading on the NYSE
and/or the TASE, respectively. We cannot assure that we will meet all the
listing criteria in the future. Delisting of our Ordinary Shares would result in
limited availability of market price information and limited news coverage. In
addition, delisting could diminish investors' interest in our Ordinary Shares as
well as significantly reduce the liquidity and price of our Ordinary Shares.
Delisting may also make it more difficult for us to issue additional securities
or secure additional financing.
WE MAY NOT BE ABLE TO PROTECT OUR INTELLECTUAL PROPERTY.
Our success is substantially dependent upon the adaptations and
configurations we make to the machinery and equipment that we purchase and upon
the manufacturing technologies, methods and techniques that we have developed
for our exclusive use. Only a part of the adaptations, configurations,
technologies or techniques used in our manufacturing process is patented.
Moreover, we purchase our machinery and equipment from third parties and we
cannot assure that a competitor will not adapt, configure or otherwise utilize
machinery or equipment in substantially the same manner as we do. In addition,
our subcontractors have access to proprietary information, including regarding
our manufacturing processes, and from time to time we also lend machinery and
equipment to subcontractors, and there is a chance that subcontractors may
breach their confidentiality undertakings toward us. Any replication of our
manufacturing process by an existing or future competitor would significantly
reduce our sales and profitability.
12
WE FACE POTENTIAL COMPETITION BY OUR FORMER EMPLOYEES.
Our trade secrets are well known to some of our employees. In the event one
or more of our current or former employees exploit our trade secrets in
violation of their non-competition and confidentiality obligations, we may be
adversely affected in the competitive market and in our relationships with our
customers and suppliers.
WE FACE POTENTIAL CONFLICTS OF INTEREST CAUSED BY INVESTOR INFLUENCE.
Our principal shareholders have a great deal of influence over the
constitution of our Board of Directors and over matters submitted to a vote of
the shareholders. As of March 15, 2008, Norfet, Limited Partnership had voting
power over approximately 21.8% of the outstanding Ordinary Shares of Tefron
(excluding 997,400 Ordinary Shares held by our wholly-owned subsidiary). In
addition, as of March 15, 2008 and based on available public information, Meir
Shamir, one of our directors, owned approximately 40.0% in Mivtach-Shamir, which
at such date was an approximately 34.45% holder in Norfet. As a result, the
corporate actions of Tefron may be significantly influenced by Mr. Shamir.
Furthermore, as of March 15, 2008, Ishay Davidi, another director, served as CEO
of FIMI 2001 Ltd., which controls the general partner of Norfet, one of the
Norfet limited partners (which is managed by FIMI 2001 Ltd.) as well as the
other Norfet limited partners by virtue of an irrevocable power of attorney. As
a result, the corporate actions of Tefron may be significantly influenced by Mr.
Davidi.
We are party to consulting and management services agreements with Norfet,
pursuant to which it agreed to provide consultancy and management services to
Tefron. See "Item 7. Major Shareholders and Related Party Transactions," and
Note 16 of the Notes to the Consolidated Financial Statements.
Israeli law imposes procedures, including, for certain material
transactions, a requirement of shareholder approval, as a precondition to
entering into interested party transactions. These procedures may apply to
transactions between Norfet and us. However, we cannot assure that we will be
able to avoid the possible detrimental effects of any such conflicts of interest
by complying with the procedures mandated by Israeli law. See "Item 6.
Directors, Senior Management and Employees - 6A. Directors and Senior
Management," "- 6C. Board Practices," and "Item 7. Major Shareholders and
Related Party Transactions."
A DETERIORATION IN ISRAEL'S RELATIONSHIP WITH NEIGHBORING COUNTRIES IN
WHICH TEFRON HAS PRODUCTION FACILITIES COULD INTERRUPT TEFRON'S PRODUCTION
AND HARM ITS FINANCIAL RESULTS.
A significant portion of our manufacturing process is performed in Jordan.
Our operations in Jordan depend largely on its relationship with the State of
Israel. In the past, there have been hostilities between Israel and Jordan. In
addition, there are currently hostilities between Israel and the Palestinians. A
deterioration in Israel's relations with Jordan could interrupt our
manufacturing operations and would adversely affect our business.
WE ARE SUBJECT TO VARIOUS RISKS RELATING TO OPERATIONS IN ISRAEL.
We are incorporated under the laws of, and our main offices and
manufacturing facilities are located in, the State of Israel. We are directly
influenced by the political, economic and security conditions in Israel. Since
the establishment of the State of Israel in 1948, a number of armed conflicts
have taken place between Israel and its Arab neighbors and a state of hostility,
varying in degree and intensity, has led to security and economic concerns for
Israel. Any major hostilities involving Israel, the interruption or curtailment
of trade between Israel and its trading partners or a significant downturn in
the economic or financial condition of Israel could have a material adverse
effect on our operations. During the summer of 2006, Israel was engaged in an
armed conflict with Hezbollah, a Lebanese Islamist Shiite militia group, which
involved thousands of missile strikes and disrupted most day-to-day civilian
activity in northern Israel. This conflict adversely affected our sales and
increased our costs. Further, the establishment of a Hamas government in Gaza
has created additional unrest and uncertainty in the region. We cannot assure
that ongoing or revived hostilities or other factors related to Israel will not
have a material adverse effect on us or our business.
13
Generally, all male adult citizens and permanent residents of Israel under
the age of 54, unless exempt, are obligated to perform up to 36 days of annual
military reserve duty. Additionally, all such residents are subject to being
called to active duty at any time under emergency circumstances. Some of our
officers and employees are currently obligated to perform annual reserve duty.
No assessment can be made as to the full impact of such requirements on our
workforce or business, and no prediction can be made as to the effect of any
expansion or reduction of such military obligations on our business. See "Item
4. Information on the Company - 4B. Business Overview - Conditions in Israel."
During 2004, a general strike at Israel's ports caused a shortage of raw
materials and resulted in a loss to the Company of sales of approximately $2.5
million. This shortage also resulted in a decrease in production volume and an
increase in operating costs, which affected our ability to achieve greater
operating efficiencies. Although Israel's Ministry of Finance, the Histadrut
(General Federation of Labor in Israel), and the Israel Ports Authority signed
an agreement in February 2005 which is intended to ensure five years without
labor strikes, a further strike or labor disruption at Israel's ports may occur
and have an adverse effect on us or our business.
YOU MAY NOT BE ABLE TO ENFORCE CIVIL LIABILITIES IN THE UNITED STATES
AGAINST OUR OFFICERS AND OUR DIRECTORS.
Most of our officers and all of our directors reside outside the United
States. Service of process upon them may be difficult to effect within the
United States. Furthermore, because the majority of our assets are located
outside the United States, any judgment obtained in the United States against us
or any of our directors and officers may not be collectible within the United
States.
14
ITEM 4. INFORMATION ON THE COMPANY
4A. HISTORY AND DEVELOPMENT OF THE COMPANY
Tefron Ltd. was incorporated under the laws of the State of Israel on March
10, 1977. Our principal executive offices are located at Industrial Center
Teradyon, P.O. Box 1365, Misgav 20179, Israel and our telephone number is
972-4-9900-881. We are subject to the provisions of the Israeli Companies Law,
1999. Our agent for service of process in the United States is CSC Corporation
Service Company, 2711 Centerville Rd. Suite 400, Wilmington, DE 19808.
Below is a summary of significant events in our development:
1990 First bodysize cotton panty with applicated elastics
1997 Formation of Hi-Tex Founded by Tefron Ltd. and production of
first seamless panty.
Initial public offering of our Ordinary Shares on the NYSE.
1998 Acquisition of a dyeing and finishing facility to achieve greater
vertical integration of our business.
1999 Acquisition of Alba Waldensian, Inc. (Tefron USA), a manufacturer
of seamless apparel and healthcare products.
2001 Initial significant shifting of sewing production to Jordan.
2002 Reorganization of Tefron USA, including a spin-off of the Health
Product Division and the formation of the AlbaHealth joint
venture with a strategic investor, and the initial consolidation
of the seamless production activity in Hi-Tex in Israel which was
completed in the second quarter of 2003.
2003 Acquisition of all of the outstanding ordinary shares of Macro
Clothing Ltd., an entity that manufactures, markets and sells
swimsuits and beachwear.
Implementation of strategic steps to expand our product line,
including active-wear products, to diversify our product line and
client base.
2004 Closing of equity investments with two groups of investors in the
aggregate amount of $20 million.
2004 Launch of a new business division, Sports Innovation Division, or
SID, devoted to our growing US customer base in the performance
active-wear market.
2005 Listing of our Ordinary Shares for trading on the TASE (in
addition to the listing on the NYSE).
2006 Closing of a public offering of Ordinary Shares and option
certificates on the TASE for aggregate net proceeds of $13.8
million. We subsequently received approximately $5.7 million from
the exercise of the option certificates, primarily in 2007.
Disposition of our ownership interest in AlbaHealth for
consideration of approximately $13 million, consisting of
approximately $10 million paid in cash and a $3 million by an
unsecured subordinated promissory note payable in August 2009.
2006 Launch of a joint Center of Excellence with Nike, located at
Nike's world headquarters in Beaverton, Oregon.
15
CAPITAL EXPENDITURES
Our capital expenditures for fixed assets (net of grants from the
Government of the State of Israel) were $6.4 million, $3.5 million and $4.5
million for the years ended December 31, 2007, 2006 and 2005, respectively. The
2007 expenditures were primarily made in Israel to purchase new knitting
machines, dyeing and finishing machines, sewing machines and other equipment.
See Consolidated Statements of Cash Flows in the Consolidated Financial
Statements.
Our current capital expenditures include investments in equipment,
machinery and leasehold improvements in our facilities in Israel and Jordan. See
also Note 6 of the Notes to the Consolidated Financial Statements. We expect to
incur capital expenses primarily to acquire new knitting machines, dyeing and
finishing machines, and other equipment for our Hi-Tex Division and to shift
more labor intensive manufacturing processes of our Hi-Tex Division out of
Israel to Jordan and other locations to take advantage of lower labor costs.
As of the date of this Annual Report, we estimate that our capital
expenditures for 2008 will be approximately between $5 million to $7 million. We
expect to finance these investments primarily from cash generated from
operations and from cash on hand. However, the actual amount of our capital
expenditures will depend on a variety of factors, including the scope of our
sales, general economic conditions, changes in demand for our products, increase
in the sales growth of our new products, the risks and uncertainties involved in
doing business in Jordan and our ability to generate sufficient cash from
operations. See "Item 3. Key Information - 3D. Risk Factors."
4B. BUSINESS OVERVIEW
OVERVIEW
We manufacture intimate apparel, active-wear and swimwear sold throughout
the world by such name-brand marketers as Victoria's Secret, Nike, Target,
Warnaco/Calvin Klein, The Gap, J.C. Penney, lululemon athletica, , Patagonia,
Reebok, Swimwear Anywhere, El Corte Englese and other well known American and
European retailers and designer labels. Through the utilization of manufacturing
technologies and techniques developed or refined by us, we are able to
mass-produce quality garments featuring unique designs tailored to our
customers' individual specifications. Our product line includes knitted briefs,
bras, tank tops, boxers, leggings, crop tops, T-shirts, daywear, nightwear,
bodysuits, swimwear, beach-wear, active-wear, shape wear and accessories.
We seek to apply our manufacturing technologies and techniques to meet the
fashion and merchandising needs of our customers. With product innovation made
possible by our manufacturing capabilities, we invest our marketing efforts to
become a principal supplier to a more select customer base, representing some of
the leaders in the intimate apparel and active-wear industries. As a result of
this strategy, we successfully entered the United States market for quality,
competitively priced intimate apparel, active-wear and swimwear.
We are known for the technological innovation of our Hi-Tex manufacturing
process. Our Hi-Tex manufacturing process was implemented as part of our
strategy to streamline our advanced development and design skills and
manufacturing process and improve the design and quality of our products. The
Hi-Tex manufacturing process involves the utilization of a single machine that
transforms yarn directly into a nearly complete garment, replacing the knitting,
cutting, and significant sewing functions which, in traditional manufacturing,
are performed sequentially on separate machines at separate workstations.
Following this single-machine operation, all the Hi-Tex manufacturing process
requires to complete the garment is dyeing and a reduced amount of sewing and
finishing. Our Hi-Tex manufacturing process enables us to produce a
substantially wider range of fabrics, styles and product lines, resulting in a
consistently high level of comfort, quality and durability. Our fabric
engineering, product design and the comfort of our products provide us with an
opportunity to expand our sales of active-wear products.
16
We believe that our collaboration with our customers in the design and
development of our products strengthens our relationships with our customers and
improves the quality of our products. We began our relationship with Victoria's
Secret in 1991, with The Gap in 1993, with Nike and J.C. Penney in 2000 and with
Swimwear Anywhere in 2003. In 2000, we also began our relationship with Target,
which was an existing customer of Tefron USA, Inc., or Tefron USA. These
customers accounted for approximately 88.8% and 83.5% of our total sales in 2006
and in 2007, respectively. We enjoy several strategic advantages by reason of
our location in Israel and Jordan. Israel is one of the few countries in the
world that has free trade agreements with the United States, Canada, the EU, and
the EFTA. These agreements permit us to sell our products in the United States,
Canada and the member countries of the EU and the EFTA free of customs duties
and import quotas. Due to our locations in Israel and in Jordan we benefit from
exemptions from customs duties and import quotas. We also currently benefit from
substantial investment grants and tax incentives provided by the Government of
Israel and from the availability in Israel of both skilled engineers and
unskilled workers. See "- Israeli Investment Grants and Tax Incentives" and "-
Conditions in Israel -Trade Agreements."
PRODUCTS
In close collaboration with our customers, we design and manufacture
intimate apparel, active-wear and swimwear. Through our efficient capability, we
produce garments made of cotton and synthetic fibers for large-volume marketers
who, in recent years, have increased retail consumer interest for quality
intimate apparel and active-wear at affordable prices. We believe that our
advanced technology and manufacturing processes enable us to deliver intimate
apparel and active-wear that is comfortable to wear, fits well, fashionable,
made of high-quality fabric and difficult to imitate. Our advanced design skills
enable us to provide our costumer with leading-fashion swimwear. Our product
line includes knitted briefs, bras, tank tops, boxers, leggings, crop tops,
T-shirts, daywear, nightwear, bodysuits, swimwear, beach-wear, active-wear,
shape wear and accessories.
The principal markets for our products are the United States and Europe.
For a breakdown of our sales by geographic area and operating segments, see Note
15c. of the Notes to the Consolidated Financial Statements.
MANUFACTURING AND PRODUCTION
We have developed manufacturing innovations for various stages of the
production process, including improvements in the knitting of fabric as well as
the cutting and sewing of individual garments. Our manufacturing technologies
and techniques allow us to provide our customers with mass-produced quality
merchandise at competitive prices. In May 1997, we introduced our Hi-Tex
manufacturing process which consolidates a large portion of the production steps
into a single machine, the Santoni knitting machine, and has enabled us to
produce a substantially wider range of fabrics, styles and product lines at a
consistently higher level of comfort, quality and durability. The Santoni
knitting machines are seamless knitting machines that use state-of-the-art
computer controlled circular knitting technology.
We manufacture products principally to fill firm orders and, therefore,
maintain limited inventory of finished goods. Customers typically send projected
product requirements to us between three and six months in advance of the
delivery requirements and place firm orders between three and six months prior
to the desired delivery date. This lead time allows us to coordinate raw
material procurement with its usage and to adjust production levels in order to
meet demand.
17
We currently produce intimate apparel, active-wear and swimwear products in
different style, color and yarn combinations. We manufacture cotton knit
products using our advanced proprietary manufacturing techniques and also
produce fine products from synthetic fibers, including micro-fibers, using our
Cut & Sew manufacturing process and our highly automated Hi-Tex manufacturing
process.
A significant portion of the manufacturing process for our swimwear
products is outsourced to subcontractors, mostly in China and Cambodia, but also
in Israel, that manufacture the products based on our development, design and
specifications. In many cases, these subcontractors manufacture the complete
garment that is delivered to our customers. Our quality assurance and quality
control personnel work with our subcontractors to maximize product quality
standards. We are gradually expanding our manufacturing sources in the Far-East
for our Cut & Sew products, supervised by our personnel, including with regard
to product quality standards.
MANUFACTURING PROCESS
We utilize vertically integrated production processes and automated
production techniques. These processes involve the following steps:
o PRODUCT DESIGN - Traditionally, manufacturers produce several samples
of a garment from which apparel marketers can select. In contrast, our
sophisticated technology enables us to collaborate with our customers
earlier in the design process to develop customized garments. In
addition, we work independently to develop new products, to increase
sales to existing customers and to exploit market opportunities and
increase penetration where we can establish a competitive advantage.
o RAW MATERIAL DEVELOPMENT - After a design is developed, raw materials
for the production of the product are purchased. Our raw materials
include cotton yarns, blends of cotton and synthetic yarn (E.G.,
cotton-spandex, cotton-spandex and cotton-viscose), micro-fiber nylons
and blends of micro-fiber nylon with spandex, elastic, polyester and
other innovative natural materials. We purchase our raw materials from
several international and domestic Israeli suppliers and historically
have not experienced any difficulty in obtaining raw materials to meet
production requirements. Raw materials are generally purchased against
actual orders or customers' firm commitments, although we have a
policy of maintaining a minimum level of those raw materials that are
in repeated demand. From time to time, when market conditions are
favorable, we have entered into contracts with various suppliers of
basic yarns for delivery over a period of three to six months. The
costs of our raw materials are subject to fluctuations. See "Item 3.
Key Information - 3D. Risk Factors - We are subject to fluctuating
costs of raw materials."
o KNITTING (ONLY CUT & SEW) - The knitting needs of our Cut & Sew
Division are provided by subcontractors in Israel that currently
supply substantially all of our fabric needs in Israel. Our
subcontractors utilize advanced and automated technology to knit
tubular fabric, including bodysize fabrics. Bodysize fabrics, which
are required for bodysize garments, enable maximum use of fabric and
minimize waste during cutting. We operate 120 automatic knitting
machines, which have capacity to produce approximately 300 tons of
fabric per month (depending on the type of fabric). During 2007, we
produced approximately 85 tons of fabric per month.
o DYEING AND FINISHING - Our Cut & Sew Division's dyeing and finishing
facility can satisfy a significant portion of its dyeing and finishing
needs in-house. The remainder is outsourced to dyeing and finishing
subcontractors in Israel. Almost all of the dyeing and finishing needs
of our Hi-Tex Division are provided by a subcontractor in Israel. We
have established testing procedures which examine all fabric upon
return to us to ensure the color consistency, stability and durability
of our dyed fabric.
18
o CUTTING (ONLY CUT & SEW) - Traditionally, manufacturers manually cut
multiple layers of fabric on a cutting table. To modernize the
production process, manufacturers have used computerized, automatic
cutting equipment. Our employees and subcontractors use both this
equipment and highly advanced machines that automatically and
continuously lay and cut tubular knitted fabric to specified sizes,
minimizing fabric waste and the amount of sewing required, which
results in a more consistent and comfortable garment.
o SEWING (ONLY CUT & SEW) - Cut fabrics are sewn to complete the
garment, including the addition of accessories such as elastic waist
and leg bands as well as labels. Working with computerized equipment
and robotics, our employees and subcontractors sew garments with far
greater precision than if sewn entirely by hand. Our Cut & Sew
Division operates a sewing facility in Israel and in Jordan, and also
subcontracts sewing in Israel and Jordan. In addition, in China, India
and Cambodia, our Cut & Sew Division subcontracts a vertical
manufacturing process, and it is also commencing business
relationships with subcontractors in Vietnam.
o TESTING AND QUALITY CONTROL - We place significant emphasis on quality
control and use quality assurance teams at each stage of the
manufacturing process.
HI-TEX MANUFACTURING PROCESS
In an effort to streamline and automate the manufacturing process further,
we developed the Hi-Tex manufacturing process, which utilizes state-of-the-art
technology that eliminates most stages of the manufacturing process while
increasing efficiency, consistency and quality. We have successfully combined
existing hosiery and apparel technologies to create this new manufacturing
process. The Hi-Tex process includes the utilization of a single machine, the
Santoni knitting machine, that transforms yarn directly into a nearly complete
garment, replacing the knitting, cutting, sewing and accessorizing functions
which, in traditional manufacturing, are performed sequentially on separate
machines at separate workstations. Following this single-machine operation, all
the Hi-Tex process requires to complete the garment is dyeing and a limited
amount of sewing and finishing, which are conducted using our proprietary
techniques. In addition to providing a higher level of manufacturing efficiency,
Hi-Tex has enabled us to produce a substantially wider range of fabrics, styles
and product lines at a consistently higher level of comfort, quality and
durability. This is made possible, in large part, because the Hi-Tex process
knits a garment directly, rather than cutting it from fabric, allowing for the
production of any size, pattern or design with even greater precision than
previously available.
The Hi-Tex manufacturing process is currently being used to produce
knit-to-size intimate apparel, active-wear and outerwear. We operate our Hi-Tex
knitting process in our principal production facilities in Segev, Israel. We
operate our Hi-Tex sewing process in one sewing facility in Israel and also
subcontract sewing in Israel and in Jordan. See "Item 4. Information on the
Company - 4D. Property, Plants and Equipment." At December 31, 2007, we had a
total of 765 fully equipped Santoni Knitting machines at the Hi-Tex facilities
in Israel. We also have 36 fully equipped Santoni Knitting machines at Tefron
USA in Valdese, North Carolina, which are currently not operated, but may be
transferred to other manufacturing facilities at our discretion.
We believe that the Hi-Tex manufacturing process represents an innovative
combination of cutting-edge technology and technical expertise and has further
strengthened our reputation within the industry as a leader in automated
manufacture and design. In addition, with both the Hi-Tex manufacturing process
and the traditional cut-and-sew process, we are able to produce garments made
from synthetic fibers in addition to existing lines of cotton products. We
specialize in developing and using performance yarns. The Hi-Tex manufacturing
process was developed in-house through the adaptation and configuration of
machinery and equipment purchased from third parties. Although developed for its
exclusive use, only a part of these adaptations and configurations is patented.
We also believe that our high market-understanding, and our development and
operation skills will assist us in operating subcontracted manufacturing in the
Far-East.
19
SALES AND MARKETING
Our marketing strategy focuses on selling quality products to large U.S.
and European marketers of intimate apparel, active-wear and swimwear. We market
our products directly to major retailers, which sell them under their own labels
and to several companies that market nationally advertised brands. We have sales
offices which are located in Portland, Oregon, in New York, New York, in London,
England and in Israel.
We see the active-wear market as an added opportunity to promote our
innovative production and design capabilities. Our office in Portland, Oregon,
and the Center of Excellence office located inside Nike's campus in Beaverton,
Oregon, serve to advance our active-wear sales, to strengthen the communication
with our active-wear customers, and to improve our services. In addition, we
have dedicated a separate development and sales team in Israel for the
active-wear customers.
INTELLECTUAL PROPERTY
Only a part of the adaptations, configurations, technologies and techniques
used in our manufacturing process is patented. See "Item 3. Key Information -
3D. Risk Factors - We may not be able to protect our intellectual property."
However, we have obtained patents for certain aspects of our manufacturing
process and for certain products, such as the "millennium bra," the "bonded bra"
and the "ultrasonic bra," whose fabric is joined without sewing.
We emphasize the development of new technologies that will enable the
manufacture of products that have an advantage over the products currently
existing in the market.
SEASONALITY
Although our operations are affected by the substantial cyclical variations
of our principal customers' businesses, downturns in the general economy, a
change in consumer purchasing habits and other events, we have not identified a
clear seasonal pattern to our general business, other than with respect to our
swimwear products. In the swimwear segment, most of our sales are consummated
between December and May.
CUSTOMERS
Our customers represent some of the leading marketers of intimate apparel,
active-wear and swimwear in the world. Approximately 78% of our sales in 2007
were derived from the worldwide sale of our products to our four largest apparel
customers, Victoria's Secret, Nike, Target, and J. C. Penney. In 2007, we
continued our close cooperation with our largest active-wear customer, Nike, and
strengthened our business relationship with lululemon athletica, maintained our
business relationships with other active-wear customers, such as Patagonia and
Reebok and began working with other active-wear customers. In the swimwear area,
we strengthened our business relationship with our largest swimwear customers,
Swimwear Anywhere, Target and Abercombie and Fitch, while we maintained our
business relationships with other swimwear customers and developed business
relationships with new customers in the USA and Europe.
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The following table outlines the dollar amount and percentage of total
sales to our customers:
CUSTOMER 2005 2006 2007
----------------- ----------------- -----------------
(Dollars in millions)
Victoria's Secret (1) $ 69.0 40.3% $ 72.6 38.6% $ 62.1 39.1%
Nike $ 44.1 25.8% $ 54.2 28.8% $ 37.4 23.6%
Target $ 18.5 10.8% $ 18.9 10.0% $ 18.2 11.4%
J. C. Penney $ 5.5 3.2% $ 5.3 2.8% $ 6.2 3.9%
Others $ 34.2 19.9% $ 34.5 19.8% $ 34.7 22.0%
Total $171.3 100% $188.1 100% $158.6 100%
- --------------------------------------------------------------------------------
(1) Includes sales to Mast Industries, Inc. on behalf of Victoria's Secret,
Victoria's Secret Catalog and Cacique.
We established our relationship with our largest customer, Victoria's
Secret, in 1991. Currently, we manufacture underwear, nightwear, loungewear,
bodysuits, active wear and bras for Victoria's Secret. We continue to seek to
expand and strengthen our relationship with Victoria's Secret by providing the
retailer with a continuing line of new products. However, we cannot assure that
Victoria's Secret will continue to buy our products in the same volumes or on
the same terms as they did in the past. For instance, during the past few years
we have been asked by Victoria's Secret to reduce the prices of Victoria's
Secret's Logo program. See "Item 3. Key Information - 3D. Risk Factors - We
depend on a small number of principal customers who have in the past purchased
our products in large volumes. We cannot assure that these customers or any
other customer will continue to buy our products in the same volumes or on the
same terms."
We began our working relationship with Nike in 2000. Currently, we supply
them with active-wear for men and women.
We began our relationship with Target in 2000, which was an existing
customer of Tefron USA. Currently, we supply them with underwear for men and
women, bras, active-wear and swimwear products.
J.C. Penney was a customer of Alba prior to our acquisition of Alba.
Currently, we supply them with intimate apparel and active wear for women.We
began our working relationship with The Gap in 1993. Currently, we supply The
Gap with underwear and sleepwear.
We began our working relationship with lululemon athletica in 2006.
Currently, we supply lululemon athletica, mainly with underwear and active-wear
for men and women.
The volume of products ordered by customers is subject to the cyclical
variations in their business. See "Item 3. Key Information - 3D. Risk Factors -
Our principal customers are in the clothing retail industry, which is subject to
substantial cyclical variations. Our revenues will decline significantly if our
principal customers do not continue to buy our products in large volumes due to
an economic downturn."
We depend on a small number of principal customers. Our principal customers
are in the retail industry, which is subject to substantial cyclical variations.
Our annual and quarterly results may vary which may cause our profits and/or the
market price of our Ordinary Shares to decline. Consequently, there can be no
assurance that sales to current customers will continue at the current rate.
21
BACKLOG
Our backlog of orders during 2007 ranged from $31.6 million to $74.1
million, as compared to a range of $49.4 million to $63.3 million during 2006.
This backlog is comprised of firm orders that represent the average production
volume mainly for the subsequent three to six months. Backlog data and any
comparison thereof as of different dates may not necessarily indicate future
sales.
ISRAELI INVESTMENT GRANTS AND TAX INCENTIVES
The Israeli government has established investment and tax incentive
programs for enterprises that invest and do business in Israel. Israeli
government support is provided primarily to industrial and tourism companies
that help fulfill certain economic objectives of the Israeli government, such as
creating employment in selected locations in Israel, competing in international
markets, utilizing innovative technologies, producing value-added products and
generating income in foreign currency.
LAW FOR THE ENCOURAGEMENT OF CAPITAL INVESTMENTS, 1959
Certain of our production and development facilities have been granted
Approved Enterprise status pursuant to the Law for the Encouragement of Capital
Investments, 1959 (the "Investment Law") under the grant track. The Investment
Law provides that a capital investment in eligible facilities may, upon
application to the Investment Center of the Ministry of Industry and Trade of
the State of Israel, known as the Investment Center, be designated an Approved
Enterprise. Each certificate of approval for an Approved Enterprise relates to a
specific investment program delineated both by its financial scope, including
its capital sources, and by its physical characteristics, e.g., the equipment to
be purchased and utilized pursuant to the program. The tax benefits derived from
any such certificate of approval relate only to taxable income attributable to
the specific Approved Enterprise. To date, we have enjoyed Israeli government
grants with respect to such programs for significant amounts of our capital
expenditures. Such grants were available from 1997 to 2007 for an amount equal
to 24% of the eligible annual capital expenditures for programs not exceeding
investments of NIS140 million in any year, and for an amount equal to 20% of the
eligible annual capital expenditures for projects exceeding investments of
NIS140 million. Following the exhaustion of our net operating loss carry
forwards in 1997, we began to benefit from certain tax incentives as a result of
the Approved Enterprise status of certain of our facilities. Approved
Enterprises related to investment programs from January 1997 onwards in
designated areas, which include the location of our primary plants, are exempt
from tax for the first two years of the Benefit Period commencing in the first
year in which the taxable income is generated.
On April 1, 2005, an amendment to the Investment Law came into effect. The
amendment revised the criteria for investments qualified to receive tax
benefits. An eligible investment program under the amendment will qualify for
benefits as a Privileged Enterprise (rather than the previous terminology of
Approved Enterprise). Among other things, the amendment provides tax benefits to
both local and foreign investors and simplifies the approval process. The period
of tax benefits for a new Privileged Enterprise commences in the "Year of
Commencement." This year is the later of (1) the year in which taxable income is
first generated by a company, or (2) a year selected by the company for
commencement, on the condition that the company meets certain provisions
provided by the Investment Law (Year of Election). The amendment does not apply
to investment programs approved prior to December 31, 2004. The new tax regime
applies to new investment programs only.
The Company does not intend to distribute any amounts of its undistributed
tax-exempt income derived from an "Approved Enterprise" as a dividend. The
Company intends to reinvest its tax-exempt income and not to distribute such
income as a dividend. No deferred income taxes have been provided on income
attributable to the Company's Approved Enterprise programs as the undistributed
tax exempt income is essentially permanent in duration.
22
LAW FOR THE ENCOURAGEMENT OF INDUSTRY (TAXES), 1969
Pursuant to the Law for the Encouragement of Industry (Taxes), 1969 (the
"Encouragement of Industry Law"), a company qualifies as an "Industrial Company"
if it is a resident of Israel and at least 90% of its gross income in any tax
year (exclusive of income from certain defense loans, capital gains, interest
and dividends) is derived from an "industrial enterprise" it owns. An
"industrial enterprise" is defined as an enterprise whose major activity, in a
given tax year, is industrial manufacturing.
We believe that we currently qualify as an Industrial Company. Accordingly,
we believe that we are entitled to certain tax benefits, including a deduction
of 12.5% per annum on the purchase of patents or certain other intangible
property rights (other than goodwill) used for the development or promotion of
the industrial enterprise over a period of eight years beginning with the year
in which such rights were first used.
The tax laws and regulations relating to the adjustment of taxable income
for local inflation provide that an industrial enterprise is eligible for
special rates of depreciation deductions. These rates vary in the case of plant
and machinery according to the number of shifts in which the equipment is being
operated and range from 20% to 40% on a straight-line basis, or 30% to 50% on a
declining balance basis.
Moreover, industrial enterprises which are Approved Enterprises (see above)
can choose between (a) the special rates referred to above and (b) accelerated
regular rates of depreciation applied on a straight-line basis with respect to
property and equipment, generally ranging from 200% (with respect to equipment)
to 400% (with respect to buildings) of the ordinary depreciation rates during
the first five years of service of these assets, provided that the depreciation
on a building may not exceed 20% per annum. In no event may the total
depreciation exceed 100% of the cost of the asset.
In addition, Industrial Companies may (i) elect to file consolidated tax
returns with additional related Israeli Industrial Companies and (ii) deduct
expenses related to public offerings in equal amounts over a period of
three-years.
Eligibility for benefits under the Encouragement of Industry Law is not
contingent upon the approval of any governmental authority. No assurance can be
given that we will continue to qualify as an Industrial Company, or will avail
ourselves of any benefits under this law in the future or that Industrial
Companies will continue to enjoy such tax benefits in the future.
COMPETITION
The intimate apparel, the active-wear and swimwear markets are highly
competitive. Our products compete with products of other manufacturers in
Israel, Europe, the United States, South and Central America and Asia.
Competition in our markets is generally based on price, quality and customer
service.
Although we have invested in Santoni knitting machines to manufacture our
seamless products, a competitor of the Santoni brand could manufacture similar
machines at lower prices, thereby increasing the competition we would face in
the intimate apparel and active-wear markets. In addition, some of our
competitors currently manufacture their products using Santoni knitting
machines. See "Item 3. Key Information - 3D. Risk Factors - Our markets are
highly competitive and some of our competitors have numerous advantages over us;
we may not be able to compete successfully."
In addition, we benefit from Israel's status as one of the few countries in
the world that currently has free trade agreements with the United States,
Canada, the EU and the EFTA which permit us to sell our products in the United
States, Canada and the member countries of the EU and the EFTA free of customs
duties and imports quotas. Further, government incentives that reduce the cost
of our equipment may not be available to us in other countries. We are also able
to sell our products manufactured at our facilities in Jordan free from customs
duties and import quotas to the United States and Europe under certain
conditions. These favorable terms enable us to maintain the core of our
knowledge-based operation in Israel, while competing on the basis of price.
23
CONDITIONS IN ISRAEL
We are incorporated under the laws of, and many of our offices and
manufacturing facilities are located in, the State of Israel. Accordingly, we
are directly affected by political, security and economic conditions in Israel.
Our operations would be materially adversely affected if major hostilities
involving Israel should occur or if trade between Israel and its present trading
partners should be curtailed.
POLITICAL CONDITIONS IN ISRAEL
Since the establishment of the State of Israel in 1948, a number of armed
conflicts have taken place between Israel and its Arab neighbors and a state of
hostility, varying from time to time in intensity and degree, has led to
security and economic concerns for Israel. A peace agreement between Israel and
Egypt was signed in 1979, and a peace agreement between Israel and Jordan was
signed in 1994. However, as of the date hereof, Israel has not entered into any
peace agreement with Syria or Lebanon. No prediction can be made as to whether
any other agreements will be entered into between Israel and its neighboring
countries, whether a final resolution of the area's problems will be achieved,
the nature of any such resolution or whether civil unrest will resume and to
what extent such unrest would have an adverse impact on Israel's economic
development or on our operations in the future.
There is substantial uncertainty about how or whether any peace process
will develop or what effect it may have upon us. During the summer of 2006,
Israel was engaged in an armed conflict with Hezbollah, a Lebanese Islamist
Shiite militia group, which involved thousands of missile strikes and disrupted
most day-to-day civilian activity in northern Israel. Further, the establishment
of a Hamas government in Gaza has created additional unrest and uncertainty in
the region. Ongoing violence between Israel and its Arab neighbors and
Palestinians may have a material adverse effect on our business, financial
condition or results of operations.
Certain countries, companies and organizations continue to participate in a
boycott of Israeli firms. We do not believe that the boycott has had a material
adverse effect on us, but there can be no assurance that restrictive laws,
policies or practices directed towards Israel or Israeli businesses will not
have an adverse impact on our business.
Generally, all male adult citizens and permanent residents of Israel under
the age of 54, unless exempt, are obligated to perform up to 36 days of annual
military reserve duty. Additionally, all such residents are subject to being
called to active duty at any time under emergency circumstances. Some of our
officers and employees are currently obligated to perform annual reserve duty.
While we have operated effectively under these requirements since we began
operations, no assessment can be made as to the full impact of such requirements
on our workforce or business, and no prediction can be made as to the effect on
us of any expansion or reduction of such obligations.
ECONOMIC CONDITIONS IN ISRAEL
Israel's economy has been subject to numerous destabilizing factors,
including a period of rampant inflation in the early to mid-1980s, low foreign
exchange reserves, fluctuations in world commodity prices, military conflicts
and civil unrest. The Israeli government has, for these and other reasons,
intervened in various sectors of the economy employing, among other means,
fiscal and monetary policies, import duties, foreign currency restrictions and
control of wages, prices and foreign currency exchange rates. The Israeli
government has periodically changed its policies in all these areas.
24
TRADE AGREEMENTS
Israel is a member of the United Nations, the International Monetary Fund,
the International Bank for Reconstruction and Development, and the International
Finance Corporation. Israel is a signatory to the General Agreement on Tariffs
and Trade, or GATT, which provides for the reciprocal lowering of trade barriers
among its members. In addition, Israel has been granted preferences under the
Generalized System of Preferences from the United States, Australia, Canada and
Japan. These preferences allow Israel to export the products covered by such
program either duty-free or at reduced tariffs. Israel became associated with
the European Economic Community (now known as the European Union) in a Free
Trade Agreement concluded in 1975, which confers certain advantages with respect
to Israeli exports to most European countries and obligates Israel to lower its
tariffs with respect to imports from those countries over a number of years.
In 1985, Israel and the United States entered into an agreement to
establish a Free Trade Area that has eliminated all tariff and certain
non-tariff barriers on most trade between the two countries. On January 1, 1993,
an agreement between Israel and the EFTA established a free trade zone between
Israel and the EFTA nations. In recent years, Israel has established commercial
and trade relations with a number of other nations (including the People's
Republic of China, Russia, India and other nations in Asia and Eastern Europe)
with which Israel had not previously had such relations.
In January 1995, the GATT members entered into an agreement with respect to
Textile and Clothing. According to this agreement, all non-tariff barriers were
gradually decreased since the date of the agreement until their full omission on
January 1, 2005. In 2004, in expectation of this change, the United States
decided to extend the period of barriers relating to products exported from
China.
Israel is a party to Qualified Industrial Zones agreements - since 1998
with Jordan and the United States, and since December 2004, with Egypt and the
United States. These agreements enable us to execute part of our manufacturing
process in defined zones in Jordan or in Egypt, and enjoy exemption from U.S.
custom duties and quotas once exported to the United States.
U.S. GOVERNMENT REGULATION
Our manufacturing and other facilities in the USA, Israel, Europe, Jordan.
China, India and Cambodia are subject to various local regulations relating to
the maintenance of safe working conditions and manufacturing practices.
Management believes that it is currently in compliance in all material respects
with all such regulations.
4C. ORGANIZATIONAL STRUCTURE
Our significant subsidiaries are the following wholly-owned subsidiaries:
(i) Hi-Tex Founded by Tefron Ltd., a company incorporated under the laws of
Israel, (ii) Macro Clothing Ltd., a company incorporated under the laws of
Israel, (iii) Tefron USA, Inc., a company incorporated under the laws of
Delaware, (iv) El-Masira Textile Company Ltd., a company incorporated under the
laws of Jordan, and (v) Tefron UK Limited, a company incorporated under the laws
of the United Kingdom.
25
4D. PROPERTY, PLANTS AND EQUIPMENT
ISRAEL
As of December 31, 2007, we maintained manufacturing and administrative
facilities at the following sites in Israel and Jordan:
APPROX.
SQUARE NUMBER OF LEASE
FACILITY IN ISRAEL FOOTAGE EMPLOYEES EXPIRATION (1) FUNCTION
- ------------------ ------- --------- -------------- --------
Petach Tikva 1,900 4 2008 Management offices,
partly sublease
Segev: Central Factory - Tefron (2) 83,000 123 2012 Development, Knitting packaging,
storage and administrative functions
Segev: Central Factory - Hi-Tex 1 (2) 143,000 376 2011 Development, Knitting, sewing,
packaging, storage and administrative
functions
Segev: Central Factory - Hi-Tex 2 (2) 178,000 309 2012 Knitting, packaging and storage
Holon - Macro Center 12,000 81 2009 Design, development, Sewing and
administrative functions
Yarka 23,000 310 2012 Sewing and packaging
Netanya: Dyeing Factory 68,000 24 2009 Dyeing and finishing
FACILITY IN JORDAN Irbid (4) 207,000 828 2008(3) Sewing and packaging factory and logistic
and some other manufacturing processes
(1) Including any renewal options.
(2) Not including an additional option for a 12-15 year lease exercisable every
three years on 90 days' prior advance notice.
(3) The agreement is renewable annually at our option.
(4) Includes free land lease of 97,000 square feet.
For a description of our plans regarding our facilities, see Note 6 of the
Notes to the Consolidated Financial Statements.
We believe that our existing facilities in Israel and Jordan are
well-maintained, in good operating condition and provide adequate space for our
current level of operations as well as for a significant increase in sales
volume. We further believe that our facilities and operations are in substantial
compliance with current Israeli governmental regulations regarding safety,
health and environmental pollution.
UNITED STATES, ENGLAND AND CHINA
As of December 31, 2007, Tefron USA, Tefron UK and Macro maintained
manufacturing and administrative facilities at the following sites in the United
States, England and China:
APPROX. NUMBER OF
FACILITY IN UNITED STATES, ENGLAND AND CHINA SQUARE FOOTAGE PERSONNEL FUNCTION
- -------------------------------------------- -------------- --------- --------
Valdese, NC - Warehouse 163,610 18 Warehouse (Consumer Products)
and distribution
Valdese, NC 52,644 - Partly subleased
New York City - Offices 1,500 2 Sales Offices and Showroom
Portland, OR- Offices 2,029 6 Sales Offices and Showroom
London, England - Offices 350 2 Sales Office
Dong Guang, China - Office 6,000 5 Sourcing and development
26
All plants in Valdese, North Carolina are of brick and steel construction,
and most areas have been air-conditioned. Since April 2005, we are leasing for a
period of seven years 1,500 square feet at 150 West 30th Street New York, New
York. The remainder of Tefron USA's physical properties are held in fee simple.
Tefron USA's physical properties are subject to a lien pursuant to a credit
agreement entered into in connection with the acquisition of Tefron USA. See
"Item 10. Additional Information - 10C. Material Contracts - Credit Agreement."
We believe our existing facilities in the United States are well-maintained, in
good operating condition and provide adequate space for Tefron USA's current
level of operations as well as for a significant increase in sales volume.
We further believe that Tefron USA is in substantial compliance with
present United States federal, state and local regulations regarding the
discharge of materials into the environment. Capital expenditures required to be
made in order to achieve such compliance have had no material adverse effect
upon Tefron USA's earnings or the competitive position of Tefron USA. We believe
that continued compliance will not require material expenditures.
ITEM 4A. UNRESOLVED STAFF COMMENTS
Not Applicable.
27
ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS
GENERAL
OUR BUSINESS; DEVELOPMENTS
We manufacture intimate apparel, active-wear and swimwear sold throughout
the world by name-brand marketers as well as well known American and European
retailers and designer labels. Our product line includes knitted briefs, bras,
tank tops, boxers, leggings, crop tops, T-shirts, daywear, nightwear, bodysuits,
swimwear, beach-wear, active-wear, shape wear and accessories.
We have two divisions: Seamless (also called Hi-Tex) and Cut & Sew. Our
Seamless Division, which manufactures intimate apparel and active-wear products,
generated approximately 51.4% of our revenues during 2007. Our Cut & Sew
Division, which manufactures intimate apparel, active-wear and swimwear
products, generated approximately 48.6% of our revenues during 2007.
Our Hi-Tex manufacturing process involves a vertically integrated
production process, from the design of the product to the knitting, dyeing and
sewing of the product. However, our Hi-Tex manufacturing process utilizes
state-of-the-art technology that eliminates a significant number of stages of
the manufacturing process while enabling our Hi-Tex Division to produce a
substantially wider range of fabrics, styles and product lines at a consistently
high level of comfort, quality and durability. The Hi-Tex manufacturing process
was developed in-house through the adaptation and configuration of machinery and
equipment purchased from third parties. Although developed for our exclusive
use, most of these adaptations and configurations are not patented. The
manufacturing for our Hi-Tex Division takes place mainly in Israel, where we
operated 765 fully equipped Santoni knitting machines as of December 31, 2007.
Our Cut & Sew manufacturing process also involves a vertically integrated
production process. We are involved in all steps in the process, from the design
of the product to the knitting, dyeing, cutting and sewing of the product. The
knitting, dyeing and cutting processes for our intimate apparel and active-wear
products of our Cut & Sew Division take place in Israel and most of the sewing
for these products takes place in Jordan. Our swimwear products are produced by
subcontractors mainly in the Far East.
2007 DEVELOPMENTS
Despite our transformation in recent years from an intimate apparel company
with one anchor customer to a more diversified active-wear, swimwear and
intimate apparel company, our sales decreased in 2007 principally due to the
decrease in sales to our largest active-wear customer and our largest intimate
apparel customer, which together accounted for approximately 62.7% of our sales
in 2007. We continue our efforts to broaden our costumer base and expect to add
new costumers during 2008. At the same time, our profits were adversely impacted
by a number of factors, including our lower revenue and manufacturing levels,
the significant devaluation of the U.S. dollar versus the NIS in 2007, and the
factors described below.
In our Hi-Tex Division, the learning curve required for the manufacture of
new and technologically advanced products, which have been ordered in short
production runs for a larger number of apparel categories, increased our costs
and decreased our operating efficiency. We are working to overcome the
manufacturing challenges in our Hi-Tex Division. At the same time, the lower
proportion of our more profitable Hi-Tex Products in the sales mix to Nike
during the second half of the year reduced our operating profits. We are looking
to increase our proportion of our more advanced Hi-Tex products to Nike in the
coming year. We believe our relationship with Nike is strong, and it remains a
central part of our strategy driving our long term growth in active-wear.
28
The cost structure of our manufacturing process for intimate apparel and
active-wear products, which takes place principally in Israel and Jordan,
continues to be higher than the cost structure of many of our competitors in the
Far East, Egypt and Central America. This competition, mainly for the sale of
intimate apparel products, has caused an erosion of our prices in 2007,
particularly for our Cut & Sew older collections. We are endeavoring to move
additional portions of our Cut & Sew manufacturing process in the near future
from Israel to Jordan, the Far East and other locations to benefit from the
lower labor costs in those locations.
Our Cut & Sew manufacturing process for swimwear products continues to take
place principally in the Far East to keep costs low.
CURRENCY; REVENUES; RAW MATERIALS
The currency of the primary economic environment in which our business is
conducted is the U.S. dollar. Consequently, we use the dollar as our functional
currency. Transactions and balances denominated in dollars are presented at
their dollar amounts. Transactions and balances in other currencies are
converted into dollars in accordance with the principles set forth in Statement
No. 52 of the Financial Accounting Standards Board and resulting gains and
losses are included in the statement of income. The financial information below
reflects our operations on a consolidated basis.
Substantially all of our revenues are derived from the sale of our
products, primarily in the United States. We recognize revenues from the sale of
our products upon delivery when all other revenue recognition criteria are met.
Our payment terms vary based on customer and length of relationship. We do not
have any long-term supply obligations.
We purchase our raw materials from several international and domestic
suppliers and historically have not experienced any difficulty in obtaining raw
materials to meet production requirements. Raw materials are generally purchased
against actual orders or customers' firm commitments, although we have a policy
of maintaining a minimum level of those raw materials that are in repeated
demand. From time to time, when market conditions are favorable, we have entered
into contracts with various suppliers of basic cotton for delivery over a period
of three to six months.
CRITICAL ACCOUNTING POLICIES
We prepare our consolidated financial statements in conformity with
accounting principles generally accepted in the U.S. As such, we are required to
make certain estimates, judgments and assumptions that we believe are reasonable
based upon the information available at the time they are made. These estimates,
judgments and assumptions affect the reported amounts of assets and liabilities
as of the date of the financial statements, as well as the reported amounts of
expenses during the periods presented.
Our management believes the significant accounting policies which affect
management's more significant estimates, judgments, and assumptions used in the
preparation of the Company's consolidated financial statements and which are the
most critical to aid in fully understanding and evaluating the Company's
reported financial results include the following:
o Revenue recognition;
o Inventory valuation;
o Property, plant and equipment; and
o Income taxes and valuation allowance.
REVENUE RECOGNITION
Revenues from sales are recognized in accordance with Staff Accounting
Bulletin No. 104, "Revenue Recognition in Financial Statements" ("SAB No. 104"),
when delivery has occurred, persuasive evidence of an agreement exists, the
vendor's fee is fixed or determinable, no further obligation exists and
collectibility is probable.
29
INVENTORY VALUATION
At each balance sheet date, we evaluate our inventory balance for excess
quantities and obsolescence. We estimate the excess inventory of products and
raw materials which are not designated for existing or projected orders as well
as inventory that is not of saleable quality, estimate their market value and
reduce their carrying value accordingly. Misjudgement in planning inventory
levels or in the assessment of the market value of the excess raw materials and
products may require us to record inventory mark downs that would be reflected
in cost of sales in the period the revision is made.
PROPERTY, PLANT AND EQUIPMENT
Our property, plant and equipment are reviewed for impairment in accordance
with Statement of Financial Accounting Standard No. 144 "Accounting for the
Impairment or Disposal of Long-Lived Assets," whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to the future undiscounted cash
flows expected to be generated by the assets. If such assets are considered to
be impaired, the impairment to be recognized is measured by the amount by which
the carrying amount of the assets exceeds the fair value of the assets. Assets
to be disposed of by way of sale are reported at the lower of the carrying
amount and fair value less costs to sell.
INCOME TAXES AND VALUATION ALLOWANCE
On January 1, 2007, we adopted Financial Accounting Standards Board
Interpretation (FIN) No. 48, "Accounting for Uncertainty in Income Taxes," which
contains a two-step approach to recognizing and measuring uncertain tax
positions accounted for in accordance with Statement of Financial Accounting
Standards No 109, "Accounting for Income Taxes.", or SFAS No. 109. The first
step is to evaluate the tax position taken or expected to be taken in a tax
return by determining if the weight of available evidence indicates that it is
more likely than not that, on an evaluation of the technical merits, the tax
position will be sustained on audit, including resolution of any related appeals
or litigation processes. The second step is to measure the tax benefit as the
largest amount that is more than 50% likely to be realized upon ultimate
settlement. Prior to January 1, 2007, we estimated our uncertain income tax
obligations in accordance with SFAS No. 109, "Accounting for Income Taxes" (SFAS
No. 109) and SFAS No. 5 "Accounting for Contingencies" ("SFAS No. 5").
In addition, the calculation of our tax liabilities involves uncertainties
in the application of complex tax regulations, particularly under the Investment
Law. We estimate our tax liabilities under the various investment programs under
the Investment Law based on a complex mix of factors, including our estimates of
our future growth of revenues, the particular investment program under which
revenue will be generated and the location where such revenues will be
generated. We may need to record a charge for tax if our estimates are
inaccurate or if we experience changes due to off-shoring certain of our
production processes.
30
RESULTS OF OPERATIONS
The following table sets forth our results of operations expressed as a
percentage of total sales for the periods indicated:
YEAR ENDED DECEMBER 31,
2005 2006 2007
----- ----- -----
Sales 100% 100% 100%
Cost of sales 82.7 77.2 87.7
----- ----- -----
Gross profit 17.3 22.8 12.3
Selling and marketing, general and
administrative expenses 7.9 9.0 11.2
----- ----- -----
Operating income 9.4 13.8 1.1
Financial expenses, net 1.9 1.1 0.8
----- ----- -----
Income before taxes on income 7.5 12.7 0.3
Taxes on income 2.5 3.0 0.0
----- ----- -----
Income from continuing operation 5.0 9.7 0.3
Income (loss) from discontinued
operation (3.1) 0.1 0.0
----- ----- -----
Net income 1.9 9.8 0.3
===== ===== =====
YEAR ENDED DECEMBER 31, 2007 COMPARED TO YEAR ENDED DECEMBER 31, 2006
SALES
CONSOLIDATED. Sales for the year ended December 31, 2007 were $158.6
million, a 15.7% decrease compared to sales of $188.1 million for the year ended
December 31, 2006. Our sales of intimate apparel decreased 10.9% from $100.9
million in 2006 to $89.9 million in 2007, our sales of active-wear products
decreased 29.2% from $59.4 million in 2006 to $42.0 million in 2007 and our
sales of swimwear decreased 4.0% from $27.8 million in 2006 to $26.7 million in
2007. Below is a table that describes our 2006 and 2007 sales of intimate
apparel, active-wear and swimwear products:
SALES
-------------------------------------------------------------------------
2006 2007
---------------------------------- ----------------------------------
(Dollars in thousands)
CUT & SEW SEAMLESS TOTAL CUT & SEW SEAMLESS TOTAL
-------- -------- -------- -------- -------- --------
Intimate Apparel $ 53,148 $ 47,742 $100,890 $ 37,114 $ 52,763 $ 89,877
Active-wear 4,995 54,411 59,406 13,216 28,831 42,047
Swimwear 27,808 -- 27,808 26,690 -- 26,690
TOTAL 85,951 102,153 188,104 77,020 81,594 158,614
SEAMLESS. Sales for the year ended December 31, 2007 for this segment
were $81.6 million, a 20.1% decrease compared to sales of $102.2 million
for the year ended December 31, 2006. This decrease in sales was due to a
decrease of 47.0% of our sales of active wear products from $54.4 million
in 2006 to $28.8 million in 2007 due to a decrease in sales to our major
active wear customer, which was partially offset by an increase of 10.5% in
our sales of intimate apparel from $47.7 million in 2006 to $52.8 million
in 2007, which was principally due to increase in our sales to our largest
intimate apparel customers.
31
CUT & SEW. Sales for the year ended December 31, 2007 for this segment
were $77.0 million, a 10.4% decrease compared to sales of $86.0 million for
the year ended December 31, 2006. This decrease in sales was mainly due to
a decrease of 30.2% in our sales of intimate apparel from $53.1 million in
2006 to $37.1 million in 2007. This decrease was due to a reduction in
sales to our major intimate apparel customer and to pricing pressure in
older intimate apparel collections of our intimate apparel product line,
and was partially offset by an increase of 164.6% in our sales of active
wear from $5.0 million in 2006 to $13.2 million in 2007 due to an increase
in our sales to Nike for their 'new generation' of the Pro Core category.
COST OF SALES
Cost of sales consists primarily of materials, various salaries and related
expenses, subcontracting expenses and other overhead expenses related to our
manufacturing operations. Cost of sales decreased by 4.1% to $139.1 million in
2007 as compared to $145.1 million in 2006 due to a decrease in our sales
volume. As a percentage of sales, cost of sales increased to 87.7% in 2007 as
compared to 77.2% in 2006. This increase was primarily due to the lower sales
and manufacturing levels in 2007. In addition, this was due to the significant
devaluation of the U.S. dollar versus the NIS, the previously identified pricing
pressure in older Cut & Sew collections of our intimate apparel product line,
and increased manufacturing complexities in our Hi-Tex Division associated with
the introduction of new and complex products, and short production runs.
SELLING AND MARKETING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling and marketing, general and administrative expenses consist
primarily of costs relating to salaries to employees engaged in sales,
marketing, distribution, administration and management activities, freight and
other administrative costs. Selling and marketing, general and administrative
expenses increased by 3.7% to $17.7 million in 2007 as compared to $17.1 million
in 2006. This increase was primarily due to an increase in export freight
charges as a result of different shipping terms with some of our customers
obligating us to deliver our goods to the customers' site and an increase in air
freight charges due to late shipments. In addition, this was due to the
significant devaluation of the U.S dollar versus the NIS. As a percentage of
sales, selling and marketing, general and administrative expenses increased from
9.1% in 2006 to 11.2% in 2007.
OPERATING INCOME
CONSOLIDATED. Operating income for the year ended December 31, 2007 was
$1.8 million (1.1% of sales), compared to operating income of $25.9 million
(13.8% of sales) for the year ended December 31, 2006. This decrease in
operating income was due to the decrease in the gross profit and the increase of
the selling and marketing, general and administrative expenses, as discussed
above.
SEAMLESS. Operating loss for the year ended December 31, 2007 for this
segment was $0.5 million, compared to operating income of $16.4 million
(16.0% of sales) for the year ended December 31, 2006. This decrease was
due to the lower revenues and manufacturing levels, manufacturing
complexities associated with the introduction of new and complex products,
short production runs and the costs associated with delays in delivery and
the significant devaluation of the U.S dollar versus the NIS, as discussed
above.
CUT & SEW. Operating income for the year ended December 31, 2007 for
this segment was $2.3 million (2.9% of sales), compared to operating income
of $9.5 million (11.1% of sales) for the year ended December 31, 2006. The
decrease resulted mainly from previously identified pricing pressure in
older collections of our intimate apparel product line, lower revenues and
manufacturing levels and from the significant devaluation of the U.S.
dollar versus the NIS, as discussed above.
32
FINANCIAL EXPENSES, NET
Financial expenses, net decreased to $1.3 million in 2007 as compared to
$1.9 million in 2006. This decrease was mainly due to a reduction of our net
bank debt as a result of a positive cash flow. This decrease was partly offset
by currency exchange losses resulting from the weakening of the U.S dollar as
compared to the NIS.
INCOME TAXES
Tax benefit for 2007 was $20,000 as compared to tax expense of $5.7 million
for 2006. The main reason for this decrease was the decrease in our pretax
profit which was $0.5 million for 2007 compared to $24.0 million for 2006.
YEAR ENDED DECEMBER 31, 2006 COMPARED TO YEAR ENDED DECEMBER 31, 2005
SALES
CONSOLIDATED. Sales for the year ended December 31, 2006 were $188.1
million, a 9.8% increase compared to sales of $171.3 million for the year ended
December 31, 2005. Our sales of intimate apparel decreased 0.7% from $101.6
million in 2005 to $100.9 million in 2006, our sales of active-wear products
increased 14.3% from $52.0 million in 2005 to $59.4 million in 2006 and our
sales of swimwear increased 56.7% from $17.8 million in 2005 to $27.8 million in
2006. Below is a table that describes our 2005 and 2006 sales of intimate
apparel, active-wear and swimwear products:
SALES
-------------------------------------------------------------------------
2005 2006
---------------------------------- ----------------------------------
(Dollars in thousands)
CUT & SEW SEAMLESS TOTAL CUT & SEW SEAMLESS TOTAL
-------- -------- -------- -------- -------- --------
AIntimate Apparel $ 37,564 $ 64,061 $101,625 $ 53,148 $ 47,742 $100,890
ctive-wear 6,140 45,821 51,961 4,995 54,411 59,406
Swimwear 17,750 -- 17,750 27,808 -- 27,808
TOTAL 61,454 109,882 171,336 85,951 102,153 188,104
SEAMLESS. Sales for the year ended December 31, 2006 for this segment
were $102.2 million, a 7.0% decrease compared to sales of $109.9 million
for the year ended December 31, 2005. This decrease in sales was due to a
decrease of 25.5% of our sales of intimate apparel products from $64.1
million in 2005 to $47.7 million in 2006 due to a decrease in sales to our
major intimate apparel customer, which was partially offset by an increase
of 18.7% in our sales of active-wear from $45.8 million in 2005 to $54.4
million in 2006 which was principally due to increase in our sales to Nike
for their Nike Pro and Nike + categories.
CUT & SEW. Sales for the year ended December 31, 2006 for this segment
were $86.0 million, a 39.9% increase compared to sales of $61.5 million for
the year ended December 31, 2005. This increase in sales was due to an
increase of 41.5% in our sales of intimate apparel from $37.6 million in
2005 to $53.1 million in 2006 due to an increase in sales to our major
intimate apparel customer and due to an increase of 56.7% in our sales of
swimwear products from $17.8 million in 2005 to $27.8 million in 2006 due
to increased sales to our two largest swimwear customers. The increase in
sales of our intimate apparel and swimwear product lines was partly offset
by a decrease of 18.6% in our sales of active-wear products from $6.1
million in 2005 to $5.0 million in 2006.
33
COST OF SALES
Cost of sales consists primarily of materials, various salaries and related
expenses, subcontracting expenses and other overhead expenses related to our
manufacturing operations. Cost of sales increased by 2.5% to $145.1 million in
2006 as compared to $141.6 million in 2005 due to an increase in our sales
volume. As a percentage of sales, cost of sales decreased to 77.2% in 2006 as
compared to 82.7% in 2005. This improvement in gross margin was primarily due to
an increase in our sales volume, continued improved operating efficiencies and
further transfer of our sewing capacity to Jordan with lower labor costs.
SELLING AND MARKETING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling and marketing, general and administrative expenses consist
primarily of costs relating to salaries to employees engaged in sales,
marketing, distribution, administration and management activities, freight and
other administrative costs. Selling and marketing, general and administrative
expenses increased by 25.8% to $17.1 million in 2006 as compared to $13.6
million in 2005. This increase was primarily due to the growth in our sales
volume, the expansion of our selling activities related to our swimwear product
line and an increase in our freight expenses mainly due to the increase in sales
of our swimwear product line. A number of our swimwear customers required us to
be responsible for delivering their products directly to their distribution
warehouse, which increased our freight expenses. As a percentage of sales,
selling and marketing, general and administrative expenses increased from 7.9%
in 2005 to 9.0% in 2006.
OPERATING INCOME
CONSOLIDATED. Operating income for the year ended December 31, 2006 was
$25.9 million (13.8% of sales), compared to operating income of $16.1 million
(9.4% of sales) for the year ended December 31, 2005. This increase in operating
income was due to the increase in gross profit, as discussed above.
SEAMLESS. Operating income for the year ended December 31, 2006 for
this segment was $16.4 million (16.0% of sales), compared to operating
income of $13.3 million (12.1% of sales) for the year ended December 31,
2005. This improvement was due to an increased contribution of higher
margin products, the improvement in our operating efficiencies and further
transfer of sewing capacity to Jordan, as discussed above.
CUT & SEW. Operating income for the year ended December 31, 2006 for
this segment was $9.5 million (11.1% of sales), compared to operating
income of $2.9 million (4.7% of sales) for the year ended December 31,
2005. The increase resulted mainly from the growth in sales volume and the
improvement in our operating efficiencies.
FINANCIAL EXPENSES, NET
Financial expenses, net decreased to $1.9 million in 2006 as compared to
$3.2 million in 2005. This decrease was mainly due to a significant reduction of
our net bank debt over the course of the year primarily as a result of the sale
of our interest in AlbaHealth, our public offering of securities on the Tel-Aviv
Stock Exchange and cash provided by our operating activities. This decrease was
partly offset by currently exchange losses resulting from the weakening of the
U.S dollar as compared to the NIS.
INCOME TAXES
Tax expense for 2006 was $5.7 million as compared to tax expense of $4.3
million for 2005. The main reason for this increase was the increase in our
pretax profit which was $24.0 million in 2006 compared to $12.9 million in the
year 2005.
34
LIQUIDITY AND CAPITAL RESOURCES
2007 SOURCES AND USES OF CASH
During 2007, we generated $3.0 million in cash from operating activities
compared to $27.8 million during 2006. In addition, we received:
o proceeds of $4.3 million from the exercise of tradable options issued
in the secondary offering of our securities on the Tel Aviv Stock
Exchange, and
o Proceeds of $17.2 million from sale of marketable securities and
proceeds of $13.0 million from repayments of bank deposits.
This cash flow was used to repay a net amount of $5.9 million in bank debt,
invest $5.4 million, net, in property, plant and equipment, invest $19.0 million
in marketable securities, and together with other cash flow activities, decrease
our cash and cash equivalents, deposits and marketable securities balance by
$3.7 million from $20.1 million at December 31, 2006 to $16.4 million at
December 31, 2007.
Cash provided by operating activities is net income (loss) adjusted for
certain non-cash items and changes in assets and liabilities. For 2007, cash
provided by operating activities was $3.0 million, compared to $27.8 million in
2006, while our net income decreased in 2007 to $0.5 million compared to net
income of $18.4 million in 2006. During 2007, the majority of our decrease in
our cash flow provided by operating activities as compared to 2006 was mainly
due to the decrease in our net income (excluding non cash expenses).
CONTRACTUAL AND OTHER COMMITMENTS
We have various commitments primarily related to long-term debt. The
following tables provide details regarding our contractual cash obligations and
other commercial commitments subsequent to December 31, 2007:
CONTRACTUAL OBLIGATIONS(1)(2) TOTAL 2008 2009 2010 2011 2012+
- ----------------------------- ----- ---- ---- ---- ---- -----
Long-Term Bank Debt $19.3 $ 5.9 $ 5.5 $ 2.8 $ 2.8 $ 2.3
Operating Lease Obligations $11.5 $ 3.1 $ 2.8 $ 2.6 $ 2.6 $ 0.4
Severance Pay (3) $ 2.6 -- -- -- -- --
Other Long-Term Obligations (4) -- -- -- -- -- --
TOTAL CONTRACTUAL CASH OBLIGATIONS $33.4
OTHER COMMERCIAL COMMITMENTS TOTAL AMOUNTS AVAILABLE 2007(5)
- ---------------------------- ----------------------- -------
Lines of Credit $22.2 $ 0
Guarantees/Letters of Credit $ 11 $ 6.5
TOTAL COMMERCIAL COMMITMENTS $33.2 $ 6.5
(1) Contractual obligations are defined as agreements for finance purposes
that are enforceable and legally binding on Tefron and that specify all
significant terms, including fixed or minimum quantities to be purchased, and
the approximate timing of the transaction. Because our purchase orders are based
on our current manufacturing needs, our agreements for the purchase of raw
materials and other goods and services are not included in the table above.
35
(2) This table does not include payments of interest on our long-term bank
debt, due to its variable nature. Interest on our long-term bank debt ranges
from three-month LIBOR plus 1.2% to three-month LIBOR plus 1.5%. As of March 15,
2008, the three-month LIBOR was 4.83%.
(3) Severance pay relates to accrued severance obligations to our Israeli
employees as required under Israeli labor law.
(4) This table does not include deferred tax liabilities, net, of $11.8
million. We do not know in what year this long-term obligation will be payable.
(5) These credit lines facilities are revolving on a yearly basis.
LOAN FACILITIES
At December 31, 2007, outstanding borrowings from banks, comprised of long
term debt, totaled $19.3 million, including current maturities of $5.9 million.
The bank loans bear interest at three months LIBOR plus 1.2% to 1.5% and are
scheduled to mature during the next five years.
Long-term loans include a term loan facility of our subsidiary, Tefron USA,
with Bank Hapoalim B.M. and Israel Discount Bank of New York entered into in
connection with the acquisition of Tefron USA, in the outstanding amount of $6.0
million, which until recently was payable in eight quarterly installments
commencing March 15, 2008 through December 15, 2009. During March 2008, we
converted these loans into new loans received from our Israeli banks and, as a
result, the loans are payable in seventeen quarterly installments commencing
June 30, 2008 through June 29, 2012.
The term loan facility is secured by a floating lien on all the personal
property of Tefron USA and its subsidiaries, pledges of all non-margin stock of
Tefron USA owned by our U.S. subsidiary, Tefron U.S. Holdings Corp., and all
subsidiary stock then owned by Tefron USA, and guaranties made by us, Hi-Tex
Founded by Tefron Ltd. and by Tefron U.S. Holdings Corp.
The bank loan agreements contain various covenants which require, among
other things, that we maintain certain financial ratios related to shareholders'
equity and operating results. In addition, the terms prohibit us and Tefron USA
from incurring certain additional indebtedness, limit certain investments,
advances or loans and restrict substantial asset sales, cash dividends and other
payments to shareholders of us and of Tefron USA. These covenants and
restrictions could hinder us in operations and growth. As of December 31, 2007
and 2006, the Company was in compliance with these covenants.
EQUITY FINANCINGS
On April 22, 2004, we issued to Norfet, Limited Partnership, or Norfet,
controlled by FIMI Opportunity Fund and certain other co-investors,
approximately 3.53 million Ordinary Shares at a base price of $4.25 per share
and to a group of investors represented by Mr. Zvi Limon, or Leber,
approximately 1.07 million of our Ordinary Shares at a base price of $4.65 per
share. See "Item 10. Additional Information - C. Material Agreements - FIMI
Agreements." We applied most of the aggregate amount of $19.7 million from these
investments to repay short-term debt. On April 5, 2005, we issued, with no
further consideration, additional shares to Norfet and Leber according to share
purchase price adjustment mechanisms included in the investments agreements with
these investors.
On January 10, 2006, we completed a public auction of our Ordinary Shares
and Option Certificates (Series 1) in Israel. A total of 100,000 units,
consisting of 18 Ordinary Shares and six Option Certificates each, were issued
in the offering at a price of NIS 701.64 (approximately $151.48) per unit. Each
Option Certificate was exercisable into one Share until January 9, 2007 at an
exercise price of $9.49 per Ordinary Share denominated in NIS (subject to
adjustment for dividend distributions). Of the total number of Option
Certificates issued, 572,748 were exercised and 27,252 expired. Our total net
proceeds from the offering were approximately $13.8 million for shares plus
approximately $5.7 million generated from the exercise of the Option
Certificates. The Ordinary Shares and the shares issued upon the exercise of the
Option Certificates are listed for trading on the Tel Aviv Stock Exchange.
36
OUTLOOK
We currently believe that our cash flow from ongoing operations and our
available cash on hand and bank credit will be sufficient to finance all of our
ongoing costs and our planned investments in our business through at least the
end of 2008.
We are looking to further expand our relationship with Nike and lululemon
athletica, continue to increase our sales of swimwear products, and expand our
Cut & Sew sales from the Far East. We expect increased active-wear sales in the
first half of 2008, driving a growth in our overall sales. This is primarily due
to increased orders from Nike for their 'new generation' products from both our
Cut & Sew and Hi-Tex divisions, as well as growth in sales to lululemon. We also
expect a strong increase in first quarter sales of swimwear. Additionally, we
intend to broaden our base of customers and scope of products while entering
into new categories and increase the visibility of our Engineered for
Performance EFP(TM) technology.
However, we expect to continue to be affected by operational difficulties
in our Hi-Tex Division in the early part of 2008, and continue to be adversely
impacted by the devaluation of the U.S. dollar. In our Cut & Sew Division, we
have been informed by Victoria's Secret that they intend to gradually transfer
their sourcing of an old Cut & Sew cotton program to India beginning the second
half of 2008. We do not expect this to have a material impact on our 2008
intimate apparel revenues and profitability. See "Item 3. Key Information - 3D.
Risk Factors," and in particular "- We depend on a small number of principal
customers who have in the past bought our products in large volumes," "Our
principal customers are in the retail industry, which is subject to substantial
cyclical variations," "Our expansion into new product lines with complicated
products and different raw materials reduced our operating efficiency during
2007 and we may also face operating efficiency difficulties in the future," and
"- Our markets are highly competitive and some of our competitors have numerous
advantages over us; we may not be able to compete successfully."
DESIGN AND DEVELOPMENT OF PRODUCTS
Our design and development of products department continually strives to
improve technologies and products and develop new lines of products. We invested
approximately $4.9 million in 2005, $5.5 million in 2006 and $6.6 million in
2007 on design and development of products, including investments made by Tefron
USA.
IMPACT OF INFLATION AND CURRENCY FLUCTUATIONS
Because most of our revenues in the foreseeable future are expected to
continue to be generated in U.S. dollars, and a significant portion of our
expenses are expected to continue to be incurred in NIS, we are exposed to the
risk of appreciation of the NIS vis-a-vis the U.S. dollar. Part of our expenses
are executed in Euro and, therefore, we are also exposed to the risk of
appreciation of the Euro vis-a-vis the U.S dollar. This appreciation would cause
an increase in our NIS or Euro expenses as recorded in our U.S. dollar
denominated financial reports even though the expenses denominated in NIS or
Euro remain unchanged. A portion of our NIS denominated expenses is linked to
changes in the CPI, a portion is linked to increases in NIS payments under
collective bargaining agreements and a portion is unlinked.
37
The dollar cost of our operations in Israel is influenced by the extent to
which any increase in the rate of inflation in Israel is (or is not) offset, or
is offset on a lagging basis, by the devaluation of the NIS in relation to the
dollar. Unless inflation in Israel is offset by a devaluation of the NIS, such
inflation will have a negative effect on our profitability because we receive
most of our proceeds in dollars or NIS linked to dollar, but incur a portion of
our expenses in NIS and NIS linked to the CPI. See "Item 11. Quantitative and
Qualitative Disclosures about Market Risk - Foreign Currency Risk" and
"-Interest Rate Risk."
In 2003 and 2005, the rate of devaluation of the NIS vis-a-vis the dollar
exceeded the inflation rate in Israel. During 2003 and 2005, the rate of
inflation was (1.9)% and 2.4%, respectively, while the NIS devalued against the
U.S dollar by 7.6% and 6.9% in 2003 and 2005, respectively. During 2004, 2006
and 2007, the rate of inflation was 1.2%, (0.1)% and 3.4%, while the NIS
appreciated versus the U.S dollar by 1.6 %, 8.2% and 9.0%, respectively, and
this negatively affected our profitability.
Due to the appreciation of the NIS vis-a-vis the dollar, we incurred gross
expenses of approximately $1.0 million in 2007. This amount does not take into
account hedging transactions performed by the Company during 2007, which
diminished the adverse effect of the appreciation of the NIS in relation to the
dollar. This appreciation may continue in 2008.
A devaluation of the NIS in relation to the dollar would have the effect of
decreasing the dollar value of any assets or receivables denominated in NIS
(unless such receivables are linked to the dollar). Such devaluation would also
have the effect of reducing the dollar amount of any of our payables or
liabilities which are denominated in NIS (unless such payables or liabilities
are linked to the dollar). Conversely, any increase in the value of the NIS in
relation to the dollar will have the effect of increasing the dollar value of
any of our unlinked NIS assets and the dollar amounts of any of our unlinked NIS
liabilities. Since December 31, 2007, the U.S. dollar has continued its
devaluation vis-a-vis the NIS. As of March 17, 2008, the representative exchange
rate between the NIS and the U.S. dollar as published by the Bank of Israel was
NIS 3.426 to $1, as opposed to NIS 3.846 to $1 as of December 31, 2007.
Because exchange rates between the NIS and the dollar fluctuate
continuously (albeit with a historically declining trend in the value of the
NIS), exchange rate fluctuations and especially larger periodic devaluations
will have an impact on our profitability and on period-to-period comparisons of
our results. This impact is recorded in our consolidated financial statements in
accordance with applicable accounting principles. We may from time to time
utilize derivative financial instruments to manage risk exposure to fluctuations
in foreign exchange rates. We do not engage in any speculative or profit
motivated hedging activities. See "Item 3. Key Information - 3D. Risk Factors.
Since most of our revenues are generated in U.S. dollars and a significant part
of our expenses are in Israeli currency, we are subject to fluctuations in
inflation and currency rates."
EFFECTIVE CORPORATE TAX RATE
The taxable income of Israeli corporations was generally subject to
corporate tax at the statutory rate of 29% in 2007. The rate is scheduled to
decline to 27% in 2008, 26% in 2009, and 25% in 2010 and thereafter. However,
most of our manufacturing facilities in Israel have been granted Approved
Enterprise status under the Investment Law, and consequently income derived from
such facilities is eligible, subject to compliance with certain requirements,
for certain tax benefits beginning when such facilities first generate taxable
income. We have derived most of our income from our Approved Enterprise
facilities. Subject to compliance with applicable requirements, income derived
from our Approved Enterprise facilities will be subject to corporate tax at a
rate of 10%- 25% (based on the percentage of foreign investment in the Company)
for the earlier between: (i) 10 years beginning in the year that we had taxable
income, (ii) 12 years from commencement of production, or (iii) 14 years from
the date of approval.
In addition, should the percentage of foreign investment exceed 25%,
Approved Enterprises would qualify for reduced tax rates for an additional three
years beyond the initial seven-year period. The Benefit Period under each of our
Approved Enterprises will in any event expire 14 years following the date of the
approval of such Approved Enterprise by the Investment Center or 12 years after
production commences, whichever is earlier. In the event that the percentage of
foreign investment is between 49% and 74%, we would be subject to a corporate
tax rate of 20% on income derived from our Approved Enterprises. The proportion
of foreign investment is measured annually based on the lowest level of foreign
investment during the year. In addition, pursuant to the Investment Law,
Approved Enterprises related to investment programs from January 1997 onwards in
designated areas, which include the location of our primary plants, are exempt
from tax for the first two years of the Benefit Period commencing in the first
year in which taxable income is generated.
38
There can be no assurance that we will obtain approval for additional
Approved Enterprises, or that the provisions of the Investment Law will not
change, or that the above-mentioned foreign investment in our Ordinary Shares
will be reached for any subsequent year. See "Item 3. Key Information - 3D. Risk
Factors - We are affected by conditions to and possible reduction of government
programs and tax benefits."
GOVERNMENT PROGRAMS
We benefit from certain Israeli government programs, particularly as a
result of the Approved Enterprise status of substantially all of our existing
production facilities in Israel. This status has enabled us to receive
investment grants with respect to certain of our capital expenditures. The
Government of Israel has reduced the investment grants available to us from 38%
of eligible annual capital expenditures in 1996 to 24% of eligible annual
capital expenditures (for projects not exceeding investments of 140 million NIS
in any year) since 1997. Commencing in 2001, such investment grants were reduced
by the Government of Israel to 20% of eligible annual capital expenditures.
There can be no assurance that the Israeli government will not further reduce
such investment grants. The termination or reduction of certain programs
(particularly benefits available to us as a result of the Approved Enterprise
status of certain of our facilities) would increase the costs of acquiring
machinery and equipment for our production facilities which could have a
material adverse effect on us. See "Item 3. Key Information - 3D. Risk Factors -
We are affected by conditions to and possible reduction of government programs
and tax benefits."
EXCHANGE RATES
The following table sets forth the representative rates of exchange
published by the Bank of Israel based on US dollar- NIS transactions for the
periods and dates indicated.
YEAR ENDED DECEMBER 31, AVERAGE RATE HIGH LOW PERIOD END
- ----------------------- ------------ ---- ----- ----------
(NIS PER $1.00)
2003 4.54 4.92 4.28 4.38
2004 4.48 4.63 4.31 4.31
2005 4.49 4.74 4.30 4.60
2006 4.46 4.73 4.18 4.23
2007 4.11 4.34 3.83 3.85
The following table sets forth certain information concerning the
representative rate of exchange between the NIS and the US dollar, as published
for the months October 2007 through March 2008.
MONTH AVERAGE RATE HIGH LOW PERIOD END
- ----------------------- ------------ ---- ----- ----------
(NIS PER $1.00)
October 2007 4.01 4.05 3.97 3.97
November 2007 3.92 3.97 3.83 3.83
December 2007 3.90 4.01 3.83 3.85
January 2008 3.76 3.86 3.63 3.63
February 2008 3.61 3.66 3.58 3.64
March (through March 17, 2008) 3.55 3.66 3.40 3.43
39
On March 17, 2008, the representative rate of exchange between the NIS and
the U.S. dollar was NIS 3.43 per $1.00, as published by the Bank of Israel.
Changes in the exchange rate between the NIS and the U.S. dollar could
materially affect our financial results.
TREND INFORMATION. We expect increased active-wear sales in the first half
of 2008, driving growth in our overall sales. We are also looking for a strong
increase in first quarter sales of swimwear. However, we expect to continue to
be affected by operational difficulties in our Hi-Tex Division in the early part
of 2008, and continue to be adversely impacted by the devaluation of the U.S.
dollar. For more information, see " - Outlook."
We have also experienced erosion in prices of our Cut & Sew intimate
apparel products and decrease in sales of these products that may continue in
the future.
OFF-BALANCE SHEET ARRANGEMENTS. We have no off-balance sheet arrangements
that have or are reasonably likely to have a current or future effect on our
financial condition, revenues or expenses, results of operations, liquidity,
capital expenditures or capital resources that are material to investors, except
for foreign exchange hedging contracts. See "Item 11. Quantitative and
Qualitative Disclosures About Market Risk - Foreign Currency Risk."
40
ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
6A. Directors and Senior Management
The following table sets forth certain information concerning our current
directors, senior management and key employees as of March 15, 2008.
NAME AGE POSITION
- ---- --- --------
Yacov Gelbard 60 Chairman of the Board
Yosef Shiran 46 Chief Executive Officer and Director
Ishay Davidi 46 Director
Yarom Oren 38 Director
Micha Korman 53 Director
Meir Shamir 57 Director
Shirit Kasher 40 Director
Avi Zigelman 51 Director
Eli Admoni 68 External Director
Yacov Elinav (1) 63 External Director.
Asaf Alperovitz 38 Chief Financial Officer
Itamar Harchol 49 Chief Technology Officer
Anat Barkan 41 Manager of Human Resources
Amit Eshet 46 Supply Chain Manager
David Gerbi 58 Hi-Tex Division Manager
Ilan Gilboa 41 Cut & Sew Division Manager
Ronny Grundland 54 Swimwear Division Manager
Michal Baumwald Oron 35 Company Secretary and Legal Counsel
Alon Shadmi 46 Marketing operations ANd innovation manager
- ----------
(1) Subject to the approval of the shareholders on April 9, 2008. At a
shareholders meeting scheduled for that day, the shareholders will be asked to
ratify the reappointment of Mr. Elinav as External Director for a second three
years term, effective from July 15, 2007 and until July 14, 2010. See Form 6-K
filed with the Securities and Exchange Commission on March 13, 2007.
YACOV GELBARD began serving as the Company's active Chairman of the Board
of Directors on January 1, 2008. Mr. Gelbard served as President and CEO of
Bezeq Ltd. from 2005 to 2007, as President and CEO of Pelephone Communications
Ltd. from 2001 to 2005, as Chairman of the "Hamashbir Fashion Warehouse" Ltd in
2001, as President and CEO of XXL (Electronic Commerce) Ltd. from 1999 to 2001,
as President and CEO of Blue Square - Israel Ltd. from 1993 to 1999, and as VP
of Finance of Blue Square - Israel Ltd. from 1983 to 1993. Mr. Gelbard holds a
BA degree Economy and Accounting, Tel - Aviv University, and he is a Certified
Public Accountant.
YOSEF SHIRAN has served as Chief Executive Officer and a Director of Tefron
since January 2001. Prior to joining Tefron, Mr. Shiran was the general manager
of Technoplast Industries, an injection molding and extrusion company, from 1995
to 2000. Mr. Shiran has over 15 years of management experience. Mr. Shiran holds
a B.Sc. degree in Industrial Engineering from Ben-Gurion University and a
masters degree in Business Administration from Bar Ilan University. Since 2007,
Mr. Shiran has served as the chairman of the Textile Manufacturers Association
of Israel.
ISHAY DAVIDI has served as a director of the Company since June 2005 and
served as Chairman of the Board of Directors from November 2005 through December
2007. Mr. Davidi is the Founder and CEO of each of FIMI IV 2007 Ltd, FIMI
Opportunity 2005 Ltd, FIMI 2001 Ltd and First Israel Mezzanine Investors Ltd.,
the managing general partners of the partnerships constituting the FIMI Private
Equity Funds. Mr. Davidi also serves as a director at Retalix Ltd. (TASE,
Nasdaq), Scope Metals Group Ltd. (TASE), Orlite Industries (1959) Ltd., MDT
Micro Diamond Technologies Ltd, Orian S.M. Ltd. (TASE), Merhav-Ceramic and
Building Materials Center Ltd. (TASE), Gamatronic Electronic Industries, Ltd.
(TASE) and Bagir Group Ltd. Mr. Davidi holds a B.Sc in Industrial and Management
Engineering from Tel Aviv University and an MBA from Bar Ilan University.
41
YAROM OREN is Senior Partner at FIMI 2005 Ltd. and FIMI 2001 Ltd.. Mr. Oren
also serves as a director of Caesarea Creation Ltd., a textile manufacturer,
Bagir Group, a suits manufacturer, Scope Metals Ltd, a metal service provider
and Ginegar Plastic Products Ltd., a plastic cover films manufacturer. Yarom
Oren holds a B.Sc in Industrial Engineering from Tel-Aviv University and an MBA
from WBS England.
MICHA KORMAN has served as a director of the Company since October 2002.
Mr. Korman leads the improving, recovery and rehabilitation process for
companies. Mr. Korman held various senior management positions in the Company
from 1991 until 2003. From October 2000, he served as the Executive Vice
President of the Company. Prior to that, Mr. Korman was Chief Financial Officer
of the Company from 1991 to September 2000. Prior to joining the Company, Mr.
Korman held various senior financial and management positions with companies in
the hi-tech, beverage and food and communication industries. Mr. Korman holds a
Bachelor's degree in Economics, a Business Administration degree from Bar-Ilan
University and an LL.B degree from Kiryat Ono College and was admitted to
practice law in Israel in 2007.
MEIR SHAMIR was elected as a director of the Company on March 31, 2004 and
has been the Chairman of Mivtach Shamir Holdings Ltd., an investment company
traded on the TASE, since 1992. Mr. Shamir also serves as a director of several
companies controlled by Mivtach Shamir Holdings Ltd.
SHIRIT KASHER was elected as a director of the Company on March 31, 2004
and has been the head of Corporate & Structured Finance at Brack Capital Holding
Ltd since April 2006. From April 2005 until April 2006 Ms. Kasher was the CEO of
Telem Ltd. From 2001 to March 31, 2005, Ms. Kasher was the Business and
Corporate Counsel and Secretary of The Israel Phoenix Assurance Company Ltd. and
the General Counsel of Atara Investment Company Ltd. and Atara Technology
Ventures Limited (both from the Phoenix Group). From 1997 to 2000, Ms. Kasher
worked at S. Horowitz & Co., first as an Articled Clerk and then as an Advocate.
Ms. Kasher holds a B.Sc. and an LLB, from Tel Aviv University and is admitted to
practice law in Israel.
AVI ZIGELMAN was elected as a director of the Company on June 28, 2005.
Since 2004 Mr. Zigelman is a financial advisor and serves as a director in the
following companies: Plastro Irrigation Systems Ltd., Mizrahi Tefahot Bank Ltd.,
Fox Vizel Ltd.,King Ltd., Bram Industries Ltd., Ilex Medical Ltd., P.M.S Group
Ltd., Gindi Investments 1 Ltd., Clal Biotechnology Industries Ltd., Simha Urieli
and Sons Ltd., Milomor Trade & Communication Ltd., Arpal Aluminum Systems Ltd.,
Sialo Technology Israel Ltd., Crew Technology (1977) Ltd and Pangea Real Estates
Ltd. Since 2000 Mr. Zigelman is a member of the Professional Committee of the
Israeli Accounting Standard Board. Between 1996 and 2003, Mr. Zigelman served as
a Partner Head of Professional Practice Department of KPMG Somekh Chaikin
accounting firm. Mr. Zigelman holds an M.A. in Business Economics,
specialization in Finance, with honors, B.A in Accounting and Economics,
Economics with honors, and post degree Accounting Studies, with honors, - all
from Tel-Aviv University. Mr. Zigelman is a Certified Public Accountant.
ELI ADMONI has served as an External Director of Tefron since August 10,
2006. Mr. Admoni has been the chairman of the Clalit Health Services since 2005,
serves as a director and chairman of the finance committee of Clalit Health
Services and served as the chairman and as a director in boards of directors of
different companies from 2000 to 2005. Mr. Admoni served as the president of
Biotechnology General (Israel) Ltd from 1999 to 2000, as CEO of Caniel Israel
Can Company Ltd from 1994 to 1998, as CEO of Rafa Labs Ltd from 1989 to 1993,
and as CEO of Abic Ltd from 1982 to 1989. Mr. Admoni holds an LLB from the
Hebrew University, Jerusalem and a Business Administration degree studies from
University of Manitoba, Canada.
YACOV ELINAV has served as an External Director of Tefron since July 2004.
Between 1991 and July 2003, Mr. Elinav was a member of the Board of Management
of Bank Hapoalim B.M. Mr. Elinav also serves as a Chairman of the Board of DS
Securities Investment Ltd. and of the board of DS Mutual Funds Ltd and is a
director of Middle East Tube Ltd., New Kopel Ltd, DS Institutionals Ltd, Sapians
Ltd., B.G.I Ltd., Polar Communication Ltd. R.H. Technologies and is an external
director of Office Textile Ltd. Mr. Elinav formerly served as a director of
other prominent Israeli companies.
42
ASAF ALPEROVITZ joined Tefron in June 2005 as Chief Financial Officer. Mr.
Alperovitz has held several management positions, including that of Chief
Financial Officer of Corigin Ltd., an enterprise software company from 2003
until 2005. Prior to that, Mr. Alperovitz worked as the Head of Israeli Desk and
as High-Technology Senior Manager for Ernst & Young in both Israel and
California. Mr. Alperovitz holds a Bachelor's degree in Accounting and Economics
and a Master in Business Administration from Tel-Aviv University and is a
Certified Public Accountant.
ITAMAR HARCHOL joined Tefron in March 2003 as Chief Technology Officer.
Prior to joining Tefron, from the beginning of 2001 to February 2003, Mr.
Harchol served as the Engineering Manager of Tamuz, a manufacturer of electronic
packaging, between 1998 and 2001 he was Products Manager for the automotive
industry in Ortal Dye Casting and prior to that, between 1994 and 1997, he
served as the Engineering Manager of Inbar Reinforced Polyester which is a
plastic manufacturer of composite materials products. Mr. Harchol holds a degree
of mechanical engineering from the Nazareth College.
ANAT BARKAN joined Tefron in 2005 as Manager of Human Resources. Prior to
joining Tefron, Ms. Barkan served as manager of Human Resources in several
companies, including Golan Plastic Products from 2001 until 2005 and in
Glidat-Strauss Ltd. from 1995 until 2001. Ms. Barkan holds a Bachelor's degree
in Political Science and Sociology from Haifa University, a Master in Business
Administration from the Hebrew University and a degree in Organizational
Consulting from Haifa University.
AMIT ESHET joined Tefron in February 2001 and has served as Hi-Tex Division
manager since July 2004 and as Supply Chain manager since March 2005. Prior to
that, he served as manager quality assurance of Hi-Tex Division. Mr. Eshet
served as manager in several industrial corporations. Mr. Eshet holds a B.Sc
degree in Industrial Engineering from the Technion in Haifa.
DAVID GERBI joined Tefron as Hi-Tex Managing director in February 2005.
David has significant experience in management positions in the textile
industry. Mr. Gerbi served in Nilit Ltd. from 1977 to 1985 as a production
manager in the Textile Division, from 1985 to 1994 as a plant manager in the
Delta Galil socks division, from 1994 to 1997 as Delta fabric division manager,
from 1997 to 1999 established and managed his own private textile factory,
between 1999 to 2002 served as Delta sporting managing director, and from 2002
to 2005 was a country manager for Sara Lee in Turkey. Mr. Gerbi holds a degree
in practical engineering from ORT in Israel.
ILAN GILBOA joined Tefron as manager of Tefron's Cut & Sew Division in
March 2003. Prior to joining Tefron, Mr. Gilboa served from 1996 to February
2003 in Kulicke & Soffa Israel, a leading supplier of semiconductor assembly and
test innerconnect equipment, materials and technologies, first as a manager of
industrial engineering and last as vice president of operations and as such, was
responsible for the construction of Kulicke & Soffa's new industrial facility in
China. Mr. Gilboa holds a B.Sc and M.Sc degree in industrial engineering from
the Technion in Haifa.
RONNY GRUNDLAND joined Tefron in May 2003, following the acquisition of
Macro Clothing Ltd, and has served since then as a Head of Tefron Swimwear
Division. Prior to that Mr. Grundland served since 1995 until 2003 as the
general manager of Macro, since 1993 until 1995 he served as co-general manger
of Macpell Industries, Ltd. and as its marketing manager, since 1990 until 1992
Mr. Grundland served as an organizational advisor to textile companies in Israel
and Europe, and since 1980 until 1989 he served as a production and operational
manager in Gotex, Ltd. Mr. Grundland holds a B.Sc degree with honors in
industrial engineering form the Technion- the Technologic Institution in Israel,
and LLB with honors from Sharei-Mishpat College.
43
MICHAL BAUMWALD ORON joined Tefron in 2003 and has served as the company
secretary and general counsel since August 2004. Prior to joining Tefron, Ms.
Oron served as a lawyer and as legal counsel in a law firm, in private practice
and in the IDF. Ms. Oron holds an LLB from Tel-Aviv University and an LLM from
Bar-Ilan University and was admitted to practice law in Israel in 1996.
ALON SHADMI joined Tefron in 2003 and has served as Marketing Operations
and Innovation Manager since 2007 after serving as Business Unit Director and as
the Head of Development. Prior to joining Tefron, Mr. Shadmi served as Site
Manager of Amdocs Inc from 2001 to 2003, as VP Operation in Ginegar Plastic
Products Ltd from 1996 to 2001, and in managerial positions in Seker Planning
and Management from 1993 to 1996 and in Gadot Petrochemical Industries from 1991
to 1993. Mr. Shadmi holds MBAMasters Degree (Marketing) from the Technion
Institute, Haifa since 1997 and B.Sc. Industrial and Management Engineering with
honors, from the Technion Institute, Haifa since 1991.
6B. COMPENSATION
The aggregate direct remuneration paid to all Directors and senior
management as a group for services in all capacities for the year ended December
31, 2007 was approximately $2.2 million, of which $90,500 was paid to Directors
in their capacities as Directors. Negligible amounts were set aside or accrued
for vacation and recuperation pay for all Directors and senior management as a
group. No amounts were set aside or accrued to provide pension, retirement or
similar benefits. The amount does not include any amounts expended by us for
automobiles made available to our officers, expenses (including business travel
and professional and business association dues and expenses) reimbursed to
officers and other fringe benefits commonly reimbursed or paid by companies in
Israel and $120,000 in management fees paid to Norfet and $70,000 in management
fees paid to New York Delights, a company wholly owned by Arie Wolfson, a former
director and former chairman of the Company's Board of Directors. We have no
service contract with any of our directors that provide for benefits upon
termination of their employment as directors.
In 2007, the Company did not grant options under the Share Option Plan.
EMPLOYMENT AGREEMENTS
CHIEF EXECUTIVE OFFICER
Under the terms of our management services agreement with Mr. Yosef Shiran,
our Chief Executive Officer, and with an entity controlled by him, referred to
in this Annual Report as the Management Agreement, we pay to the entity
controlled by Mr. Shiran: (i) compensation for management services in the amount
of $26,888 plus NIS 2,065 per month, plus VAT as applicable by law, and (ii)
reimbursement of any and all reasonable direct expenses including telephone,
cellular phone and vehicle expenses. The management agreement originally
provided for the payment of an annual grant to Mr. Shiran in an amount not
higher than 2.5% of Tefron's Net Profit, as defined in the Management Agreement,
and not lower than 1.5% of such Net Profit (with any annual grant higher than
1.5% of the Net Profit subject to approvals of both the Board of Directors and
the Tefron shareholders, unless no longer required under applicable law).
Following approval of the Tefron shareholders, the Management Agreement was
amended to provide for the annual grant to be 2% of the Company's Net Profits.
In 2006, Tefron shareholders also resolved to change the definition of "Net
Profit" for the purposes of calculating the annual bonus for 2006 and thereafter
to be Tefron's annual net profit as set forth in Tefron's audited financial
statements, after deducting tax and without taking into consideration special
profits or losses (except special profits which resulted from Mr. Shiran's
actions which will be taken into consideration) or profits or losses which are
not derived from Tefron's ordinary operations. In 2007, Tefron shareholders
approved an increase of Mr. Shiran's monthly compensation starting from January
1, 2007 to $35,000 plus VAT.
44
In addition, in 2001 we granted to Mr. Shiran options to purchase 300,000
Ordinary Shares at an exercise price per share of $3.56. Of these options,
150,000 were exercised by Mr. Shiran during 2006 and the shares issued upon such
exercise were sold by Mr. Shiran. In 2002, we granted to Mr. Shiran options to
purchase 15,000 Ordinary Shares with an exercise price per share of $3.59. All
of these options are subject to the terms and conditions of our 1997 Share
Option Plan. In March 2004, the Tefron shareholders approved the grant to Mr.
Shiran of additional options to purchase 650,000 Ordinary Shares at an exercise
price of $ 4.25 per share issued in accordance with our 1997 Share Option Plan.
As of March 15, 2008, all 815,000 of Mr. Shiran's options had vested (in
addition to the 150,000 options already exercised). The agreement granting these
650,000 options included a provision providing for an adjustment to the exercise
price in the event of a dividend distribution during the period that the options
cannot be exercised, whether due to the fact that the options are not vested or
due to the terms of Section 102 of the Israel Income Tax Ordinance. In 2007,
Tefron shareholders approved a two-year extension of the period (until October
22, 2008) during which the exercise price of these options would be adjusted for
dividend distribution by Tefron, whether or not the options are exercisable at
the time of the dividend distribution.
In the event the Management Agreement is terminated by us without "cause"
or by Mr. Shiran, Mr. Shiran will be entitled to exercise the options he would
otherwise be entitled to exercise as of such date for a period ending 36 months
after such termination.
AGREEMENT WITH ARIE WOLFSON
Under the terms of our consulting and management services agreement with
Mr. Arie Wolfson, a former Director of the Company, and with a company
controlled by him, referred to herein as the Consulting Agreement, we paid to
the company controlled by Mr. Wolfson: (1) compensation for consulting services
in the amount of $15,000 per month, plus 41% cost (equivalent to the cost we
would have paid for a similar senior management wage) (total of $253,800
annually), (2) reimbursement of vehicle expenses, (3) reimbursement of
out-of-pocket expenses, and (4) reimbursement of other standard expenses
customarily provided to persons serving in such capacity in Israel. These
payments replaced payments made until 2002 to Macpell in the amount of $20,000
per month. In addition, the Consulting Agreement includes non-competition
clauses.
In addition, we granted to Mr. Wolfson options to purchase 225,000 Ordinary
Shares at an exercise price per share of $3.50. Such options were subsequently
exercised by Mr. Wolfson, and the shares issued upon such exercise were sold by
Mr. Wolfson. Pursuant to the terms of the agreement between Norfet, Limited
Partnership and the Company, on March 31, 2004, at a general meeting of
shareholders of the Company, the shareholders approved an amendment to the
Consulting Agreement which provided that as of the date on which Mr. Wolfson
ceases to act as chairman of the board of directors of the Company, and for so
long as Mr. Wolfson continued to provide consulting services to the Company, the
annual amounts payable pursuant to the Consulting Agreement would be reduced
from $253,800 to $120,000 per annum, each plus VAT. See "Item 10. Additional
Information - 10C. Material Contracts - FIMI Agreements".
Mr. Wolfson resigned as a director of the Company in April 2007, and his
management services agreement was terminated on July 2007.
45
6C. BOARD PRACTICES
Each Director, other than the External Directors, is generally elected by a
vote at the Annual General Meeting of shareholders and serves for a term of one
year or until the following Annual General Meeting. Each External Director is
elected to serve for a period of three years from the date of the Annual General
Meeting. Each office holder will serve until his or her removal by the Board of
Directors or resignation from office.
Under the Israeli Companies Law, each Israeli public company is required to
determine the minimum number of directors with "accounting and financial
expertise" that such company believes is appropriate in light of the particulars
of such company and its activities. A director with "Accounting and Financial
Expertise" is a person that, due to education, experience and qualifications, is
highly skilled and has an understanding of business-accounting issues and
financial statements in a manner that enables him/her to understand in depth the
company's financial statements and stimulate discussion regarding the manner of
presentation of the financial data. On March 8, 2006 the Board determined that
at least two members of the board would be required to have Accounting and
Financial Expertise. The Board believes it complies with such requirement.
INDEPENDENT/EXTERNAL DIRECTORS
ISRAELI COMPANIES LAW REQUIREMENTS
We are subject to the provisions of the Israeli Companies Law, 1999 which
requires that we have at least two External Directors. Under a recent amendment
to the Companies Law, at least one of the external directors is required to have
Financial Expertise and the other External Directors are required to have
Professional Expertise. A director has "Professional Expertise" if he or she
satisfies ONE of the following:
(i) the director holds an academic degree in one of these areas:
economics, business administration, accounting, law or public
administration;
(ii) the director holds an academic degree or has other higher
education, all in the main business sector of the company or in a relevant
area for the board position; or
(iii) the director has at least five years' experience in one or more
of the following (or a combined five years' experience in at least two or
more of these: (a) senior management position in a corporation of
significant business scope; (b) senior public office or senior position in
the public sector; or (c) senior position in the main business sector of
the company.
The above qualifications do not apply to external directors appointed prior
to January 19, 2006. However, an external director may not be appointed to an
additional term unless: (i) such director has "Accounting and Financial
Expertise"; or (ii) he or she has "Professional Expertise", and on the date of
appointment for another term there is another external director who has
"Accounting and Financial Expertise" and the number of "Accounting and Financial
Experts" on the board of directors is at least equal to the minimum number
determined appropriate by the board of directors.
Under the Companies Law, a person may not be appointed as an External
Director if he or his relative, partner, employer or any entity under his
control has or had during the two years preceding the date of appointment any
affiliation with the company, any entity controlling the company or any entity
controlled by the company or by this controlling entity. The term affiliation
includes: an employment relationship, a business or professional relationship
maintained on a regular basis, control, and service as an office holder. No
person can serve as an External Director if the person's position or other
business creates, or may create, conflicts of interest with the person's
responsibilities as an External Director. Until the lapse of two years from
termination of office, a company may not engage an External Director to serve as
an office holder and cannot employ or receive services from that person, either
directly or indirectly, including through a corporation controlled by that
person.
46
Under the Companies Law, External Directors must be elected by a majority
vote at a shareholders' meeting, provided that either: (1) the majority of
shares voted at the meeting, including at least one-third of the shares of
non-controlling shareholders who are participating in the voting at the meeting
in person or by proxy, vote in favor of the election; or (2) the total number of
shares voted against the election of the external director does not exceed one
percent of the aggregate voting rights in the company. The initial term of an
External Director is three years, which term may be extended for an additional
three years. Each committee of a company's board of directors must include at
least one External Director, and all External Directors must serve on the audit
committee. The Company's External Director is currently Eli Admoni. A
shareholder meeting to approve a second three-year term for Mr. Yacov Elinav,
effective from July 15, 2007 and until July 14, 2010, has been scheduled for
April 9, 2008.
NEW YORK STOCK EXCHANGE REQUIREMENTS
The Company is subject to the rules of the New York Stock Exchange
applicable to listed companies that are foreign private issuers. Under such NYSE
rules, each member of the Company's audit committee must be independent. See "-
Audit Committee" below for a description of the independence standards under the
NYSE rules as applicable to foreign private issuers.
AUDIT COMMITTEE
NYSE REQUIREMENTS. Under NYSE rules as applicable to foreign private
issuers, we are required to have an audit committee that satisfies the
independence requirements of Rule 10A-3 of the U.S. Securities Exchange Act of
1934, as amended.
The requirements implement two basic criteria for determining independence:
(i) audit committee members would be barred from accepting, directly or
indirectly, any consulting, advisory or other compensatory fee from the issuer
or any subsidiary of the issuer, other than in the member's capacity as a member
of the board of directors and any board committee, and (ii) audit committee
members may not be an "affiliated person" of the issuer or any subsidiary of the
issuer apart from his or her capacity as a member of the board and any board
committee.
The SEC has defined "affiliate" for non-investment companies as "a person
that directly, or indirectly through one or more intermediaries, controls, or is
controlled by, or is under common control with, the person specified. The term
"control" is intended to be consistent with the other definitions of this term
under the U.S. Securities Exchange Act of 1934, as "the possession, direct or
indirect, of the power to direct or cause the direction of the management and
policies of a person, whether through the ownership of voting securities, by
contract, or otherwise."
Among the roles of the audit committee is to be directly responsible for
the oversight of the work of any registered public accounting firm engaged for
the purpose of preparing or issuing an audit report or performing other audit,
review or attest services for Tefron, and each such registered public accounting
firm must report directly to the audit committee.
COMPANIES LAW REQUIREMENTS. Under the Companies Law, the board of directors
of any company that is required to nominate external directors must also appoint
an audit committee, comprised of at least three directors including all of the
external directors, but excluding the chairman of the board of directors, a
controlling shareholder and any director employed by the company or who provides
services to the company on a regular basis.
Among the roles of the audit committee is to examine flaws in the business
management of the company, in consultation with the internal auditor and the
company's independent accountants, and suggest appropriate course of action. The
audit committee also determines whether to approve certain actions and
transactions with related parties. Arrangements regarding compensation of
directors require the approval of the audit committee, the board of directors
and the shareholders.
47
CORPORATE GOVERNANCE
The Company includes on its web site a statement containing a general
description of the significant ways in which the Company's corporate governance
practices differ from those required of U.S. domestic companies under NYSE
standards. This statement can be accessed on the Company's web site at
www.tefron.com (see "Investor Relations" and then "Company Information").
QUALIFICATIONS OF OTHER DIRECTORS
Under a recent amendment to the Companies Law, the Board is required to
determine the minimum number of board member that would be required to have
Accounting and Financial Expertise. See " - Board Practices" above.
DUTIES OF DIRECTORS
The Companies Law codifies the duty of care and fiduciary duties that an
"Office Holder" (as defined below) owes to a company. An Office Holder's duty of
care and fiduciary duty include avoiding any conflict of interest between the
Office Holder's position in the company and his personal affairs, any
competition with the company, avoiding exploiting any business opportunity of
the company in order to receive personal advantage for himself or others, and
revealing to the company any information or documents relating to the company's
affairs which the Office Holder has received due to his position as an Office
Holder.
An "Office Holder" is defined as a director, managing director, chief
business manager or chief executive officer, executive vice president, vice
president, other manager directly subordinate to the CEO or any other person
assuming the responsibilities of any of the foregoing positions without regard
to such person's title. Under the Companies Law, all arrangements as to
compensation of Office Holders who are not directors and who are not controlling
shareholders require approval of the board of directors, unless the articles of
association provide otherwise. Our articles require that such a transaction
which is not irregular shall be approved by the Board of Directors or by the
Audit Committee or by any other entity authorized by the Board of Directors.
Arrangements regarding the compensation of directors or controlling shareholders
also require the approval of the shareholders.
COMMITTEES
Our Board of Directors has established an Audit Committee, Compensation
Committee, Balance Sheet Committee and Contributions Committee. The Companies
Law restricts the delegation of powers from the Board of Directors to its
committees in certain manners. The Audit Committee exercises the powers of the
Board of Directors with respect to our accounting, reporting and financial
control practices, including exercising the responsibility, where appropriate,
for reviewing potential conflicts of interest situations. The members of the
Audit Committee are Ms. Kasher and Messrs. Admoni and Korman. The members of the
Compensation Committee are Messrs. Davidi, Admoni and Shiran. The Compensation
Committee resolves the terms of employment and benefits of the Company's
officers. The Balance Sheet Committee performs a close review of the financial
statements of the Company and its members are Ms. Kasher and Messrs. Zigelman,
Korman and Admoni. The Articles of Association provide that we may contribute
reasonable sums for worthy causes, even if the contribution is not in the frame
of our business considerations. The Board of Directors has delegated this power
to the Contributions Committee. The members of the Contributions Committee are
Messrs. Davidi, Shiran and Admoni. See "Item 10. Additional Information -10B.
Memorandum and Articles of Association - Board of Directors."
6D. EMPLOYEES
At December 31, 2007, we employed 1,227 employees in Israel of whom 797
were salaried employees and 430 were hourly wage employees. At December 31,
2007, we employed 26 employees in the United States through our subsidiary,
Tefron USA, of whom 17 were salaried employees and 9 were hourly wage employees.
At December 31, 2007, El-masira employed 828 employees in Jordan all of whom
were salaried employees, and our subsidiary, Tefron UK, had one employee in the
U.K. and one subcontractor and Macro had 5 employees in China.
48
At December 31, 2006, we employed 1,393 employees in Israel of whom 588
were salaried employees and 805 were hourly wage employees. At December 31,
2006, we employed 22 employees in the United States through our subsidiary,
Tefron USA, of whom 13 were salaried employees and nine were hourly wage
employees. At December 31, 2006, El-masira employed 670 employees in Jordan all
of whom were salaried employees, and our subsidiary, Tefron UK, had one employee
in the U.K. and one subcontractor.
At December 31, 2005, we employed 1,373 employees in Israel of whom 565
were salaried employees and 808 were hourly wage employees. At December 31,
2005, we employed 40 employees in the United States through our subsidiary,
Tefron USA, of whom 19 were salaried employees and 21 were hourly wage
employees. At December 31, 2005, El-masira employed 490 employees in Jordan all
of whom were salaried employees
To increase the motivation of the workforce, many factory employees are
eligible for bonuses based upon their performance level, discipline and quality
manufacturing. We believe that relations with our employees are good.
Certain collective bargaining agreements between the Histadrut (General
Federation of Labor in Israel) and the Coordination Bureau of Economic
Organizations (including the Industrialists' Association of Israel, or the
Association) are applicable to our employees in Israel. In addition, a
collective bargaining agreement relating to members of the Association, which
governs employee relations in the textile and clothing industry, applies to most
of our employees in Israel. These agreements concern, among other things, the
maximum length of the work day and the work week, minimum wages, contributions
to a pension fund, insurance for work-related accidents, procedures for
dismissing employees, determination of severance pay and other conditions of
employment. Furthermore, pursuant to certain provisions of such agreements, the
wages of most of our employees are automatically adjusted in accordance with
cost-of-living adjustments, as determined on a nationwide basis and pursuant to
agreements with the Histadrut based on changes in the CPI. The amounts and
frequency of such adjustments are modified from time to time.
Israeli law generally requires the payment by employers of severance pay
upon the retirement or death of an employee or upon termination of employment by
the employer or, in certain circumstances, by the employee. We currently fund
our ongoing severance obligations by making monthly payments to pension funds,
employee accounts in a provident fund and insurance policies. In addition,
according to the National Insurance Law, Israeli employees and employers are
required to pay specified amounts to the National Insurance Institute, which is
similar to the U.S. Social Security Administration. Since January 1, 1995, such
amounts also include payments for national health insurance payable by
employees. The payments to the National Insurance Institute are determined
progressively in accordance with the wages and range from 8.5% to 17.7% of
wages, of which the employer contributes 0.4% to 7.0% of wages, and the employee
contributes the rest. A majority of our permanent employees in Israel are
covered by general and/or individual life and pension insurance policies
providing customary benefits to employees, including retirement and severance
benefits. The employers generally contribute up to 15.8% (depending on the
employee) of base wages to such plans and the permanent employees contribute up
to 5.5% of their base wages.
None of Tefron USA's, Tefron UK's or Macro's Chinese employees are covered
by a collective bargaining agreement.
49
6E. SHARE OWNERSHIP
As of March 15, 2008, the following directors and senior managers
beneficially held the number of Ordinary Shares set forth in the table below.
The information in this table is based on 21,202,986 (excluding 997,400 shares
held by our wholly owned subsidiary) Ordinary Shares outstanding as of March 15,
2008. The number of Ordinary Shares beneficially owned by a person includes
Ordinary Shares subject to options held by that person that were currently
exercisable at, or exercisable within 60 days of, March 15, 2008. The Ordinary
Shares issuable under these options are treated as if they were outstanding for
purposes of computing the percentage ownership of the person holding these
options but are not treated as if they were outstanding for the purposes of
computing the percentage ownership outstanding for any other person. Except as
disclosed below, to our knowledge, none of the directors, officers or key
executives listed in the Directors and Senior Management table appearing in Item
6 above beneficially owns any Ordinary Shares.
NUMBER OF % OF ORDINARY SHARES
NAME ORDINARY SHARES OUTSTANDING**
- ---- --------------- -------------
Yacov Gelbard --- ---
Ishay Davidi 4,632,767 (1) 21.84%
Meir Shamir 4,613,085 (2) 21.76%
Yosef Shiran 815,000 (3) 3.84%
Micha Korman * *
Avi Zieglman --- ---
Shirit Kasher --- ---
Yacov Elinav (1) --- ---
Eli Admoni --- ---
Yarom Oren --- ---
Asaf Alperovitz * *
Itamar Harchol * ---
Anat Barkan --- ---
David Gerbi * *
Ronny Grundland --- ---
Ilan Gilboa * *
Alon Shadmi * *
Michal Baumwald Oron * *
Directors and senior managers
as a group (10 persons) 5,735,899 (4) 27.05%
- ----------
(1) At a shareholders meeting scheduled for that day, the shareholders will be
asked to ratify the reappointment of Mr. Elinav as External Director for a
second three years term, effective from July 15, 2007 and until July 14, 2010.
See Form 6-K filed with the Securities and Exchange Commission on March 13,
2007.
* Less than 1% of the outstanding Ordinary Shares.
** Does not take into account 997,400 Ordinary Shares held by a wholly owned
subsidiary of the Company.
(1) Consists of (i) 4,613,085 Ordinary Shares held by Norfet, which Mr. Ishay
Davidi may be deemed to beneficially own under U.S. securities laws since he
serves as CEO of FIMI 2001 Ltd., which controls the general partner of Norfet,
one of the Norfet limited partners (which is managed by FIMI 2001 Ltd.) as well
as the other Norfet limited partners by virtue of an irrevocable power of
attorney; and (ii) 19,682 Ordinary Shares held by FIMI, which Mr. Ishay Davidi
may be deemed to beneficially own in accordance with the relationships described
in clause (i).
50
(2) Consists of 4,613,085 Ordinary Shares held by Norfet, which Mr. Shamir may
be deemed to beneficially own due to his 40% interest in Mivtah-Shamir, which
held an approximately 34.45% interest in Norfet as of March 15, 2008.
(3) Consists of 815,000 Ordinary Shares subject to options exercisable at prices
that are between $3.569 and $3.765 per share (which expire between 2011 and
2012).
(4) Consists of 4,613,085 Ordinary Shares held by Norfet, which Mr. Ishay Davidi
may be deemed to beneficially own under U.S securities laws since he serves as
CEO of FIMI 2001 Ltd., which controls the general partner and one of the limited
partners of Norfet and which Meir Shamir may be deemed to beneficially own under
U.S securities laws due to his 40% interest in Mivtah-Shamir, which held an
approximately 34.45% interest in Norfet as of March 15, 2008. Further, includes
19,682 Ordinary Shares held by FIMI which Mr. Ishay Davidi may be deemed to
beneficially own under U.S securities laws since he serves as CEO of FIMI 2001
Ltd., which controls the general partner and one of the limited partners of
Norfet and includes also 1,103,132 options (exercisable within 60 days) to
purchase 1,103,132 Ordinary Shares. The exercise prices of these options range
from 3.5 to 11.275 per share. These options will expire between 2009 and 2016.
SHARE OPTION PLAN
In September 1997, we adopted the Tefron Ltd. 1997 Share Option Plan to
enable us to attract and retain qualified persons as employees, consultants and
directors and to motivate such persons with an equity participation in us.
GENERAL
The Share Option Plan authorizes the issuance of options to purchase
2,712,323 Ordinary Shares. As of March 15, 2008, options to purchase 1,879,636
of such Ordinary Shares had been granted to our senior managers, directors and
employees, of which 544,620 options had been granted to our senior managers and
directors as a group. These numbers do not include options that were cancelled
or expired. Upon the occurrence of any Ordinary Share split, reverse Ordinary
Share split, recapitalization or rights offerings or other substantially similar
corporate transaction or event, we shall make such equitable changes or
adjustments necessary to the number of shares subject to each outstanding option
in order to prevent dilution or enlargement of the optionees' rights. Options
granted to our employees shall be issued to a trustee nominated by the Board of
Directors, which trustee shall hold the options, and any Ordinary Shares issued
upon exercise thereof, for the benefit of the optionees for two years from the
date of the grant. In 2007, the exercise prices of the options that were
outstanding but had neither vested nor were exercisable in light of Section 102
of the Israeli Income Tax Ordinance [New Version] 1961 at the time of the
distributions of our dividends were reduced in an amount equal to the dividends
paid per share in such distributions.
ADMINISTRATION
The Share Option Plan is administered directly by our Board of Directors or
by a committee appointed by the Board of Directors which is authorized, among
other things and, subject to the provisions of the Companies Law, to: (i)
designate participants in the Share Option Plan; (ii) determine the terms and
provisions of the options, including the number of Ordinary Shares to which an
option may relate and the terms, conditions and restrictions thereof; (iii)
accelerate the right of an optionee to exercise any previously granted options;
(iv) construe and interpret the provisions and supervise the administration of
the Share Option Plan; and (v) make all other determinations deemed necessary or
advisable for the administration of the Share Option Plan.
51
VESTING PERIODS
Unless otherwise determined by our Board of Directors and, in the case of
option grants to Directors or an interested party, approved by our shareholders,
one-third of the options granted under the Share Option Plan are exercisable on
each of the first three anniversaries from the date of grant. Unless otherwise
determined by our Board of Directors and, in the case of option grants to
Directors or an interested party, approved by our shareholders, the options
expire on the tenth anniversary from the date of grant, and any additional
options granted in the future shall vest in the same manner over a three-year
period commencing on the date of their grant.
AMENDMENT AND TERMINATION OF THE SHARE OPTION PLAN
We may, at any time and from time to time, amend, alter or discontinue the
Share Option Plan; PROVIDED, HOWEVER, that no amendment or alteration of the
Share Option Plan shall adversely affect an optionee's rights under any
outstanding option without the consent of such optionee.
ACCOUNTING TREATMENT
For a discussion of the accounting treatment of the Share Option Plan, see
Note 2(k) of the Notes to the Consolidated Financial Statements.
AMENDMENT TO THE SHARE OPTION PLAN EFFECTIVE AS OF JANUARY 1, 2003
In December 2002, in order to comply with the new tax rules under the
amended Israeli Income Tax Ordinance [New Version], 1961, our Board approved an
amendment to our Share Option Plan.
The new tax rules enable a company to issue options under three alternative
tracks, which may generally be described as follows: (i) without a trustee,
under which the income will be considered employment income, the income will
continue to be taxed at regular marginal rates of up to the maximal tax rate
plus payments to the National Insurance Institute and payment of health tax, and
no expense is deductible by the employer; (ii) with a trustee under the
employment income track, under which the options are held by a trustee for a
period of twelve months from the end of the tax year in which the grant took
place, the income is considered regular employment income taxed at marginal
rates of up to 50% plus payments to the National Insurance Institute and payment
of health tax, and the employer is entitled to a deductible expense equivalent
to the income attributed to the employee; or (iii) with a trustee under the
capital gains track, under which the options are held by a trustee for a period
of two years from the end of the tax year in which the grant took place, the
income is considered to be a capital gain and is taxable at a reduced rate of
25%, and no expense is deductible by the employer.
On February 27, 2003, in order to enable us to grant options after January
1, 2003, we filed an amendment to the Share Option Plan with the tax authorities
and informed them of our election of the capital gains track (the third
alternative above). In addition, under the amendment to the Share Option Plan,
we may also issue options under the provisions of the tax track without a
trustee under the first alternative.
The new rules and the amendment to the Share Option Plan described above
apply only to issuances of options beginning on January 1, 2003 and thereafter.
Options issued before such date will continue to be governed by the law in
effect prior to the amendment.
52
ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
7A. MAJOR SHAREHOLDERS
Except as noted herein, to our knowledge, we are not directly or indirectly
owned or controlled by another corporation or by any foreign government and no
arrangements exist the operation of which may at a subsequent date result in a
change in control of the company.
The following table sets forth the number of our Ordinary Shares owned by
any person known to us to be the beneficial owner of 5% or more of our Ordinary
Shares as of March 15, 2008. The information in this table is based on
21,202,986 Ordinary Shares outstanding as of such date (excluding 997,400 shares
held by our wholly owned subsidiary). The number of Ordinary Shares beneficially
owned by a person includes Ordinary Shares subject to options held by that
person that were currently exercisable at, or exercisable within 60 days of,
March 15, 2008. The Ordinary Shares issuable under these options are treated as
if they were outstanding for purposes of computing the percentage ownership of
the person holding these options but are not treated as if they were outstanding
for the purposes of computing the percentage ownership outstanding for any other
person. None of the holders of the Ordinary Shares listed in this table have
voting rights different from other holders of the Ordinary Shares.
NAME NUMBER OF SHARES OWNED PERCENT OF ORDINARY SHARES *
- -------------------------------- ---------------------- ----------------------------
Norfet, Limited Partnership
c/o Fimi 2001 Ltd.
"Rubinstein House"
37 Begin Rd.
Tel Aviv, Israel 4,613,085 (1) 21.76%
Wellington Management Company, LLP
75 State Street,
Boston, MA 2,985,900 14.08%
* Does not take into account 997,400 Ordinary Shares held by a wholly-owned
subsidiary of the Company.
(1) Norfet L.P is an Israeli partnership. As of March 15, 2008, 8.82% of Norfet
was held by FIMI Opportunity Fund, LP, approximately 45.61% of Norfet was
held by FIMI Israel Opportunity Fund, Limited Partnership, approximately
34.45% was held by Mivtach Shamir Holdings Ltd., approximately3.45% was
held by Migdal Insurance Company, approximately 6.89% was held by First
International Bank of Israel and approximately 0.786% was held by Zaleznick
and Butler. In addition, pursuant to Rule 13d-5, (i) Mr. Ishay Davidi, a
director of the Company, may be deemed to beneficially own the shares held
by Norfet due to his position as CEO of FIMI 2001 Ltd. and senior partner
of FIMI Israel, Opportunity Fund, Limited Partnership and FIMI Opportunity
Fund, L.P. and (ii) Mr. Meir Shamir, a director in the Company, may be
deemed to beneficially own the shares held by Norfet due to his 40.02%
interest in Mivtah Shamir.
Norfet's percentage ownership in the Ordinary Shares has decreased from
approximately 28.8% in 2004 to approximately 21.8% as of March 15, 2008 due to
Norfet's sales of Ordinary Shares in the public markets and the issuance by the
Company of additional Ordinary Shares.
At March 15, 2008, there were 17 holders of Ordinary Shares of record
registered with a United States mailing address, including banks, brokers and
nominees. These holders of record represented approximately87.6% of the total
outstanding Ordinary Shares (excluding 997,400 shares held by our wholly owned
subsidiary). Because these holders of record include banks, brokers and
nominees, the beneficial owners of these Ordinary Shares may include persons who
reside outside the United States. See "Item 7. Major Shareholders and Related
Party Transactions - 7A. Major Shareholders." -
53
7B. RELATED PARTY TRANSACTIONS
The following discussion includes summaries of the significant terms of
various agreements and transactions. Because these are summaries, they are
qualified by reference to the actual agreements, which are attached as exhibits
to this Annual Report.
The Companies Law requires that certain related party transactions be
approved as provided for in a company's articles of association and, in certain
circumstances, by a company's audit committee or its shareholders. Our Audit
Committee is responsible for reviewing potential conflicts of interest
situations where appropriate.
RELATIONSHIPS AND TRANSACTIONS WITH NORFET
As of March 15, 2008, Norfet owned 4,613,085 Ordinary Shares, which
represented approximately 21.76% of Tefron's outstanding Ordinary Shares
(excluding 997,400 shares held by Tefron's wholly owned subsidiary).
Substantially all of Norfet is owned by (i) N.D.M.S. Ltd., a company wholly
owned by FIMI Opportunity Fund L.P., (ii) FIMI Israel Opportunity Fund, Limited
Partnership and (iii) Migdal Insurance Company, Mivtach Shamir Holdings Ltd. and
the provident funds of First International Bank of Israel.
Pursuant to a Share Purchase Agreement, dated February 17, 2004, we issued
to Norfet in April 2004, 3,529,412 Ordinary Shares for a base price of $4.25 per
share and a base aggregate consideration of $15 million. Norfet also acquired an
additional 1,365,000 of our Ordinary Shares in the aggregate from Arwol and
Macpell pursuant to a separate agreement. Immediately following the closing of
these agreements, Norfet held 4,894,412, or approximately 28.8% of our
outstanding share capital, without taking into account our Ordinary Shares held
by our wholly-owned subsidiary. In April 2005, due to a purchase price
adjustment agreed to with Norfet instead of the purchase price adjustment
mechanism agreed to in the Share Purchase Agreement, we issued to Norfet an
additional 661,765 Ordinary Shares, and Arwol transferred 106,908 additional
Ordinary Shares to Norfet.
Under the Share Purchase Agreement, we also agreed to pay Norfet a
management fee of approximately $172,000 plus VAT per annum until our first
annual meeting in 2005 (which took place on June 28, 2005), and $120,000 plus
VAT thereafter.
AGREEMENTS AMONG NORFET, MACPELL AND ARWOL
Under an agreement among Norfet, Macpell and Arwol, the parties agreed to
vote all of Tefron Ordinary Shares owned or controlled by each of them for the
election of Tefron's Board of Directors of: (i) three members (of whom at least
one will qualify as an "independent director" under the NYSE rules) plus,
subject to applicable law - one external director, that shall be nominated by
Norfet (one of whom shall be a woman), (ii) three members (of whom at least one
will qualify as an independent director and a financial expert under the NYSE
rules) plus, subject to applicable law, one external director, that shall be
nominated by Arwol and Macpell, and (iii) Tefron's chief executive officer. On
April 19, 2007, Macpell sold all of its Tefron shares, and accordingly, the
shareholders agreement between Macpell, Norfet and Arwol was terminated.
The Company, Norfet, Arwol and Macpell, together with Leber Partners L.P.,
are also party to a Registration Rights Agreement, dated April 22, 2004, which
replaced the previous Registration Rights Agreements to which the Company and
certain of these shareholders had been a party. Please see "Item 10. Additional
Information- 10C. Material Contracts - Leber Partners L.P." for a more complete
description of this agreement. On November 29, 2005, the Securities and Exchange
Commission declared effective a Registration Statement on Form F-3 covering the
resale of 11,521,259 Ordinary Shares held by the shareholders party to this
agreement.
Please see "Item 10. Additional Information- 10C. Material Contracts - FIMI
Agreements" for a more complete description of these agreements.
54
RELATIONSHIPS AND TRANSACTIONS WITH MACPELL
On April 19, 2007, Macpell sold all of its Ordinary Shares. Macpell is
principally a holding company that owns various companies, including Tefron and
a partnership that mainly trades in various clothing and apparel products.
Macpell was also engaged in the construction of industrial buildings mainly
intended for the use of the Macpell group. As of March 15, 2007, 28.58% of
Macpell were controlled by Arie Wolfson, one of our former directors; 25.68% of
Macpell were controlled by Sigi Rabinowicz; and 26.52% of Macpell are controlled
by Avi Ruimi, a former Director of Tefron. The ordinary shares of Macpell are
listed and traded on the Tel Aviv Stock Exchange.
AGREEMENT WITH ARIE WOLFSON
Until July 30, 2007, we were party to a consulting and management services
agreement with Mr. Arie Wolfson, a former Director of the Company. See "Item 6.
Directors, Senior Management and Employees - 6B. Compensation". Mr. Wolfson
resigned as a director of the Company in April 2007.
RELATIONSHIPS BETWEEN SIGI RABINOWICZ AND SUPPLIERS
We understand that Sigi Rabinowicz, our former president, who also owns a
significant interest in Macpell, began to serve as an agent of some of the
suppliers from whom we regularly purchased materials, and hence may be paid a
commission with respect to such purchases. We believe that our transactions with
these suppliers are in the ordinary course and are on customary terms.
Additionally, under the terms of a retirement agreement we executed with
Mr. Sigi Rabinowicz on January 10, 2005, we paid Mr. Rabinowicz during most of
2005 certain monthly payments, employee benefits such as vacation, educational
fund, sick leave, and management and disability insurance contributions, and we
provided a vehicle to him. During 2007 we paid Mr. Rabinowicz in accordance with
the retirement agreement $162,500. The retirement agreement also included
clauses of non competition that ended on September 2007.
LEASE ARRANGEMENT
We lease the following facilities from a wholly-owned subsidiary of Macpell
(that has since merged into Macpell):
o On August 12, 1997, we entered into an agreement to lease
approximately 143,000 square feet of industrial space in a facility
(the Hi-Tex 1 facility) adjacent to its current facilities in Segev
for a current monthly rent of approximately $73,000 until 2011. The
first rental payment was made upon entrance into the facility on
October 1, 1999. Under an agreement approved by our shareholders on
August 10, 2006, the rent of this facility was reduced by 4%.
o On December 21, 1998, we entered into an agreement to lease until 2012
approximately 178,000 square feet of industrial space in a second
facility (the Hi-Tex 2 facility) adjacent to our existing facilities
in Segev from the same wholly-owned subsidiary of Macpell for a
monthly rent of approximately $89,000. The first rental payment was
made upon entrance into the facility on March 1, 2000.
We conduct our Hi-Tex manufacturing operations in these facilities:
o According to an agreement we entered into with Macpell on August 16,
1995, an 83,000 square foot facility in Segev under a lease that
expired in 2006 for a monthly rent of approximately $48,000 (the
Headquarters Facility). Under an agreement approved by our
shareholders on August 10, 2006, the lease was extended until 2012,
and the rent for the first 65,000 square feet is $28,000 and the rent
for the remaining 18,000 square feet is $2.70 per square meter.
55
The rent payable under these leases was 50% linked to the Israeli and U.S.
consumer price index and 50% to the exchange rate between the NIS and the U.S.
dollar until August 2006. Under the agreement approved by our shareholders on
August 10, 2006, all rent is paid in U.S. dollars (linked to the U.S. consumer
price index) beginning April 2006.
Under the original agreements, the monthly rent was increased by 5% every
2-3 years. Under the agreement approved by our shareholders on August 10, 2006,
the rent for all facilities is to be increased by 3% every 2-3 years (other than
the 18,000 square feet of the Headquarters Facility, for which the rent is $2.70
per square meter, which is not subject to any increase).
According to the terms of the lease agreements, we pay the property
insurance premiums on these facilities. On July 2006, we entered into an
agreement with Macpell which was approved by our shareholders on August 10, 2006
which amended the lease agreement as described above.
All of these facilities are subject to a long-term lease agreement between
Macpell's subsidiary and the Israel Land Authority. Under the terms of such
lease agreement, Macpell's affiliate was granted a 49-year lease over such
property.
In June 2007, Macpell assigned all its rights and obligations under these
agreements to a third party.
7C. INTERESTS OF EXPERTS AND COUNSEL.
Not Applicable.
ITEM 8. FINANCIAL INFORMATION
CONSOLIDATED FINANCIAL STATEMENTS
See Item 18.
LEGAL PROCEEDINGS
A former employee of the Company has filed law suits against the Company
and three of its former or current officers, with the Israeli District Court and
the Israeli Labor Law Court, seeking damages in the amount of approximately $2
million plus non-specified bodily damages, due to damages allegedly incurred by
him as a result of his imprisonment in Egypt. The Company believes that these
law suits are without merit, the Company has filed statements of defense and
intends to defend the law suits vigorously.
DIVIDEND POLICY
Although we have no established dividend policy, in the past we have
distributed dividends to our shareholders from our accumulated earnings. In
2006, we twice declared and paid dividends of approximately $5 million each, and
in 2007, we did not declare any dividends. We may distribute dividends in the
future if our Board of Directors so determines and there are sufficient
accumulated earnings in accordance with applicable law.
56
ITEM 9. THE OFFER AND LISTING
9A. OFFER AND LISTING DETAILS
Since the initial public offering of our Ordinary Shares on September 24,
1997, our Ordinary Shares have been traded on the NYSE, under the symbol "TFR."
Prior to the offering, there was no market for our Ordinary Shares.
As reported on the NYSE, the annual high and low sales prices for our
Ordinary Shares were as follows:
HIGH LOW
---- ---
2003 $ 4.80 $ 3.10
2004 $ 6.30 $ 3.50
2005 $ 8.75 $ 3.84
2006 $13.05 $ 8.30
2007 $10.95 $ 4.05
As reported on the NYSE, the quarterly high and low sales prices for our
Ordinary Shares for the last two years were as follows:
2006 HIGH LOW
---- ---- ---
First quarter $11.53 $ 8.30
Second quarter $13.05 $10.25
Third quarter $13.00 $11.00
Fourth quarter $12.12 $ 9.85
2007
----
First quarter $10.95 $ 9.13
Second quarter $10.33 $ 9.00
Third quarter $ 9.1 $ 6.09
Fourth quarter $ 7.01 $ 4.05
2008
----
First quarter (through March 15, 2008) $ 5.65 $ 3.59
As reported on the NYSE, the monthly high and low sales prices for our
Ordinary Shares for the last six months were as follows:
2007 HIGH LOW
---- ---- ---
October $ 7.01 $ 6.11
November $ 6.47 $ 4.96
December $ 5.15 $ 4.05
2008
----
January $ 5.65 $ 4.84
February $ 5.43 $ 4.71
March (through March 15, 2008) $ 4.56 $ 3.59
Our Ordinary Shares have been trading on the TASE since September 28, 2005.
57
As reported on the TASE, the annual high and low sales prices for our
Ordinary Shares were as follows:
HIGH LOW
---- ---
2006 NIS 57.80 NIS 37.33
2007 NIS 46.33 NIS 16.56
As reported on the TASE, the quarterly high and low sales prices for our
Ordinary Shares for the last two years were as follows:
2006 HIGH LOW
---- ---- ---
First quarter NIS 48.61 NIS 37.33
Second quarter NIS 57.80 NIS 45.86
Third quarter NIS 54.15 NIS 47.34
Fourth quarter NIS 50.16 NIS 43.33
2007
----
First quarter NIS 46.33 NIS 38.03
Second quarter NIS 41.69 NIS 36.87
Third quarter NIS 38.77 NIS 25.26
Fourth quarter NIS 29.00 NIS 16.56
2008
----
First quarter (through March 15, 2008) NIS 20.50 NIS 12.50
As reported on the TASE, the monthly high and low sales price for our
Ordinary Shares for the last six months were as follows:
2007 HIGH LOW
---- ---- ---
October NIS 29.00 NIS 24.92
November NIS 26.55 NIS 19.22
December NIS 20.61 NIS 16.56
2008
----
January NIS 20.42 NIS 18.55
February NIS 20.50 NIS 17.08
March (through March 15, 2008) NIS 16.63 NIS 12.50
On September 8, 1998, we announced our intention to repurchase through a
stock repurchase program up to one million of our outstanding Ordinary Shares.
As of March 15, 2008, we had repurchased and hold in our treasury 997,400
Ordinary Shares.
9B. PLAN OF DISTRIBUTION
Not Applicable.
9C. MARKETS
Our Ordinary Shares are traded on the NYSE and on the TASE.
9D. SELLING SHAREHOLDERS
Not Applicable.
9E. DILUTION
Not Applicable.
58
9F. EXPENSES OF THE ISSUE
Not Applicable.
ITEM 10. ADDITIONAL INFORMATION
10A. SHARE CAPITAL
Not Applicable.
10B. MEMORANDUM AND ARTICLES OF ASSOCIATION
SECURITIES REGISTERS
We are registered with the Israeli Registrar of Companies. Our registration
number with the Israeli Registrar of Companies is 520043407. Section 2 of our
Memorandum of Association provides that our principal objects, among other
things, are to engage in any business connected with manufacturing, processing,
supplying and marketing undergarments, textiles and ready-made clothes. Article
2A of our Articles of Association provides that we may, at any time, carry on
business in any field or type of business permitted to us, whether explicit or
implied, according to our Memorandum of Association.
BOARD OF DIRECTORS
The Companies Law requires that certain transactions, actions and
arrangements be approved as provided for in a company's articles of association
and in certain circumstances by the audit committee by the board of directors
itself and by the shareholders. The vote required by the audit committee and the
board of directors for approval of such matters, in each case, is a majority of
the disinterested directors participating in a duly convened meeting.
The Companies Law requires that a member of the board of directors or
senior management of the company promptly disclose any personal interest that he
or she may have (either directly or by way of any corporation in which he or she
is, directly or indirectly, a 5% or greater shareholder, director or general
manager or in which he or she has the right to appoint at least one director or
the general manager) and all related material information known to him or her,
in connection with any existing or proposed transaction by the company. In
addition, if the transaction is an extraordinary transaction (that is, a
transaction other than in the ordinary course of business, otherwise than on
market terms, or is likely to have a material impact on the company's
profitability, assets or liabilities), the member of the board of directors or
senior management also must disclose any personal interest held by his or her
spouse, siblings, parents, grandparents, descendants, spouse's descendants and
the spouses of any of the foregoing.
Once the member of the board of directors or senior management complies
with the above disclosure requirement, a company may approve the transaction in
accordance with the provisions of its articles of association. If the
transaction is with a third party in which the member of the board of directors
or senior management has a personal interest, the approval must confirm that the
transaction is not adverse to the company's interest. Furthermore, if the
transaction is an extraordinary transaction, then, in addition to any approval
stipulated by the articles of association, it also must be approved by the
company's audit committee and then by the board of directors, and, under certain
circumstances, by a meeting of the shareholders of the company.
Our Articles of Association provide that, subject to the Companies Law, all
actions executed by the Board of Directors or by a committee thereof or by any
person acting as a Director or a member of a committee of the Board of Directors
or by the General Manager will be deemed to be valid even if, after their
execution, it is discovered that there was a certain flaw in the appointment of
such persons or that any one of such persons was disqualified from serving at
his or her office.
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Our Articles of Association provide that, subject to the Companies Law, an
officer is entitled to participate and vote in meetings concerning the approval
of actions or transaction in which he or she has a personal interest. Subject to
the Companies Law, a transaction between an officer of Tefron or an entity
controlling Tefron, and us, or a transaction between any other person in which
an officer or an entity controlling the company has a personal interest and us,
and which is not an extraordinary transaction, shall be approved by the Board of
Directors or by the Audit Committee or by any other entity authorized by the
Board of Directors.
Our Articles of Association provide that the Board of Directors may
delegate all of its powers to such committees of the Board of Directors as it
deems appropriate, subject to the provisions of the Companies Law. The Audit
Committee is responsible for reviewing, among other things, potential conflicts
of interest situations where appropriate. See "Item 6. Directors, Senior
Management and Employees - 6C. Board Practices - Committees."
Arrangements regarding compensation of Directors require the approval of
the Audit Committee, the Board of Directors and the shareholders. The Board of
Directors may from time to time, at its discretion, cause us to borrow or secure
the payment of any money for our purposes, and may secure or provide for the
repayment of such money in the manner as it deems fit.
DESCRIPTION OF SECURITIES
We are authorized to have 49,995,500 Ordinary Shares issued, par value NIS
1.0 per share.
Our Ordinary Shares do not have preemptive rights. The ownership or voting
of Ordinary Shares by nonresidents of Israel or foreign owners is not restricted
or limited in any way by our Memorandum of Association or Articles of
Association, or by the laws of the State of Israel.
TRANSFER OF SHARES AND NOTICES. Fully paid Ordinary Shares are issued in
registered form and may be freely transferred pursuant to our Articles of
Association unless such transfer is restricted or prohibited by another
instrument. Each shareholder of record is entitled to receive at least seven
calendar days' prior notice of an ordinary shareholders' meeting and at least 21
calendar days' prior notice of any shareholders' meeting in which a special or
extraordinary resolution is to be adopted. For purposes of determining the
shareholders entitled to notice and to vote at such meeting, the Board of
Directors may fix the record date not more than 40 nor less than four calendar
days prior to the date of such meeting.
ELECTION OF DIRECTORS. The Ordinary Shares do not have cumulative voting
rights in the election of Directors. As a result, the holders of Ordinary Shares
that represents more than 50% of the voting power have the power to elect all
the Directors.
DIVIDEND AND LIQUIDATION RIGHTS. Our Ordinary Shares are entitled to the
full amount of any cash or share dividend, if declared. We may declare a
dividend to be paid to the holders of Ordinary Shares according to their rights
and interests in our profits. In the event of our liquidation, after
satisfaction of liabilities to creditors, our assets will be distributed to the
holders of Ordinary Shares in proportion to the nominal value of their
respective holdings. Such right may be affected by the grant of preferential
dividend or distribution rights to the holders of a class of shares with
preferential rights that may be authorized in the future by a special resolution
of our shareholders. Our Board of Directors may declare interim dividends and
propose the final dividend with respect to any fiscal year only out of profits.
Declaration of a final dividend requires approval by an ordinary shareholders'
resolution, which may decrease but not increase the amount proposed by the Board
of Directors. Failure to obtain such shareholder approval does not affect
previously paid interim dividends.
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VOTING, SHAREHOLDERS' MEETINGS AND RESOLUTIONS. Holders of Ordinary Shares
have one vote for each Ordinary Share held on all matters submitted to a vote of
shareholders. Such voting rights may be affected by the grant of any special
voting rights to the holders of a class of shares with preferential rights that
may be authorized in the future. The quorum required for an ordinary meeting of
shareholders consists of at least two shareholders present in person or by proxy
who hold or represent, in the aggregate, at least one-fourth of the voting
rights of the issued share capital. A meeting adjourned for lack of a quorum is
adjourned to the same day in the following week at the same time and place or
any time and place as the Directors designate in a notice to the shareholders.
At such reconvened meeting the required quorum consists of two members present
in person or by proxy who hold or represent, in the aggregate, at least
one-fourth of our voting power.
Annual general meetings of shareholders are held once every year at such
time (within a period of not more than 15 months after the last preceding annual
general meeting) and such place as determined by the board of directors. The
board of directors may call extraordinary general meetings of shareholders and
are obligated to do so upon a written request in accordance with the Companies
Law. The Companies Law provides that an extraordinary general meeting of
shareholder may be called by the board of directors or by a request of two
directors or 25% of the directors in office, or by shareholders holding at least
5% of the issued share capital of the company and at least 1% of the voting
rights, or of shareholders holding at least 5% of the voting rights of the
company.
An ordinary resolution (such as a resolution for the election of directors,
the declaration of dividends or the appointment of auditors) requires approval
by the holders of a majority of the voting rights represented at the meeting, in
person or by proxy, and voting thereon. A special or extraordinary resolution
(such as a resolution amending our Memorandum of Association or Articles of
Association or approving any change in capitalization, merger, consolidation,
winding-up, or other changes as specified in the Companies Law) requires
approval of the holders of 75% of the voting rights represented at the meeting,
in person or by proxy, and voting thereon. In addition, if our share capital is
divided into different classes of shares, the approval of the holders of 75% of
the issued shares of a particular class or a special resolution passed at a
separate general meeting of the holders of the shares of such class is required
to modify or abrogate the rights attached to such shares.
10C. MATERIAL CONTRACTS.
Set forth below are summaries of our material contracts. Because these are
summaries, they are qualified by reference to the actual agreements, which are
attached as exhibits to this Annual Report.
DISPOSITION OF INTEREST IN ALBAHEALTH LLC
MEMBERSHIP INTEREST REDEMPTION AGREEMENT
The sale of our ownership interests in AlbaHealth LLC in April 2006 was
made pursuant to an AlbaHealth Membership Interest Redemption Agreement in
consideration for approximately $13 million, consisting of approximately $10
million paid in cash and $3 million pursuant to the terms of an Unsecured
Subordinated Promissory Note, the principal amount of which is due August 31,
2009. The note bears annual interest at LIBOR plus 3%, and the payment of the
note is subordinated in favor of AlbaHealth's senior bank lenders.
In connection with the execution of the Membership Interest Redemption
Agreement, we entered into an amendment to the existing general administrative
services agreement under which we provided various general administrative
services to AlbaHealth. Pursuant to this amendment, we were to be paid $766,000
for providing these services for the 12-month period ending January 1, 2007. We
also agreed to sell to AlbaHealth as of January 1, 2007 for the price of
$600,000 all of the computer hardware, including related software licenses and
hardware and software leases comprising the computer system in Valdese, NC and
Rockwood, TN, then owned by us and used by AlbaHealth. We were also granted the
right to designate a non-voting observer to the Board of Managers of AlbaHealth
until payment of the promissory note in full.
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UNSECURED SUBORDINATED PROMISSORY NOTE
Under the terms of the Unsecured Subordinated Promissory Note issued to us
by AlbaHealth, AlbaHealth agreed to use its reasonable best efforts to negotiate
an increase in its revolving credit facility availability with its senior bank
lenders in order to prepay the principal amount of the note if trailing 12-month
EBIDTA of AlbaHealth for 2006, 2007 or 2008 reaches certain minimum amounts,
unless such increase would subject AlbaHealth to increased interest rates or
subject AlbaHealth to materially disadvantageous terms. AlbaHealth also agreed
on limitations on its ability to pay dividends, other than as necessary to
enable its security holders to pay taxes.
Upon occurrence of certain events of default, including default in the
payment of the principal when due, we can demand principal amount and all
accrued unpaid interest to be immediately due and payable. In addition, upon the
default in the payment of the principal, we also have the right to convert the
principal balance into common units of AlbaHealth at a price of approximately
$274.20 per common unit (subject to adjustments for dividends and other
distributions).
SUBORDINATION AGREEMENT
Pursuant to a Subordination Agreement we entered into with SunTrust bank,
as administrative agent for the lenders under AlbaHealth's Senior Credit
Facility, we subordinated our claims against AlbaHealth under the Unsecured
Subordinated Promissory Note to the full payment by AlbaHealth to the lenders
under its senior credit agreement; provided so long as no Default or Event of
Default under the senior credit agreement has occurred, we may receive (i)
regularly scheduled payments of interest under the Unsecured Subordinated
Promissory Note and (ii) any payments of principal and interest from AlbaHealth
after August 31, 2009. During 2007, AlbaHealth breached certain non-payment
covenants under its Senior Credit Facility, but the lender under the Facility
delivered a waiver with respect to these breaches.
FIMI AGREEMENTS
We entered into a Share Purchase Agreement, or the Tefron Agreement, dated
February 17, 2004, with Norfet, Limited Partnership, or the Investor,
substantially all of the interests of which are owned by (i) N.D.M.S. Ltd., a
company wholly owned by FIMI Opportunity Fund, L.P., (ii) FIMI Israel
Opportunity Fund, Limited Partnership and (iii) Migdal Insurance Company, Shamir
Insurers Investment Company and the provident funds of First International Bank
of Israel, pursuant to which we issued to the Investor 3,529,412 Tefron Ordinary
Shares for a base price of $4.25 per share and a base aggregate consideration of
$15 million. Due to purchase price adjustment provisions in the Tefron
Agreement, Tefron issued to Norfet an additional 661,765 Ordinary Shares in
April 2005.
In connection with the Tefron Agreement, the Investor also acquired an
additional 1,365,000 Tefron Ordinary Shares in the aggregate from Arwol and
Macpell pursuant to an Agreement, or the Macpell Agreement, by and among
Macpell, Arwol and the Investor. Following the closing of the Tefron Agreement
and the Macpell Agreement, the Investor held 4,894,412, or approximately 30.7%
of the outstanding share capital of Tefron, without taking into account the
Equity Shares. Due to purchase price adjustment provisions in the Macpell
Agreement, Arwol transferred 106,908 additional Ordinary Shares to Norfet in
April 2005.
Tefron, the Investor, Arwol and Macpell executed at the closing of the
Tefron Agreement and the Macpell Agreement a Registration Rights Agreement which
replaced the existing Registration Rights Agreement among the Company, Arwol and
Macpell.
Below is a description of the principal terms of these transactions. The
Tefron Agreement, the Registration Rights Agreement, and all transactions
contemplated by such agreements to which Tefron is a party are collectively
referred to as the "FIMI Transactions".
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TEFRON AGREEMENT
ISSUE PRICE ADJUSTMENT. Under the terms of the Tefron Agreement, in the
event Tefron's earnings before income tax, depreciation and amortization, or
EBITDA, for 2004 (excluding (i) the EBITDA of AlbaHealth to the extent that it
exceeds zero and (ii) any increase in EBITDA of Alba Waldensian, Inc. as a
result of the exercise of the put option by AlbaHealth described below) as set
forth in Tefron's audited consolidated financial statements for the year ending
on December 31, 2004 is less than $23 million, then the price per share of $4.25
will be adjusted as follows: (i) if Tefron's EBITDA for 2004 was equal to or
less than $16 million, then the share price per share was to be reduced
retroactively by $0.75 (to $3.50), and if the Company's EBITDA for 2004 is
higher than $16 million but lower than $23 million, then the share price
reduction was to be calculated in accordance with the following formula:
Price Per Share = 4.25 - 0.75*[x]
Where x = [(23,000,000 -2004 EBITDA)/1,000,000]/7]
Tefron had the discretion to decide, in such instances, whether to issue
additional shares or to refund a proportionate part of the consideration paid by
the Investor.
Tefron's EBDITA for 2004 was $11.809 million and pursuant to an amendment
to the Tefron Agreement signed on March 31, 2005 Tefron issued to Norfet an
additional 661,765 Ordinary Shares, instead of the adjustment mechanism provided
for in the Tefron Agreement.
Under the terms of the Tefron Agreement, the issue price per share will be
increased in the event that, during the three-year period following the closing
of the Tefron Agreement and the Macpell Agreement, the Investor sells at least
20% of the total number of shares purchased on April 22, 2004 from Tefron and
Macpell and Arwol for cash or publicly traded securities (excluding publicly
traded securities in connection with a merger or reorganization of Tefron), at
an average price of at least $9.22 per share (after adjustments for dividends,
share combinations and splits). The amount of the increase will be equal to the
difference between the average sale price and the threshold of $9.22 (as so
adjusted), provided that in any event, an upwards adjustment will be no more
than $0.75 per each share. The amount of any increase is to be paid by the
Investor to Tefron on the third anniversary of the closing of the Tefron
Agreement and the Macpell Agreement. After thoroughly reviewing the facts
related to the sale of shares by Norfet during the three years following the
closing of the Tefron Agreement, we have concluded that we are not entitled to
an adjustment payment from Norfet under the terms described above.
The adjustment mechanism described in the immediately preceding paragraph
will also apply in respect of the four-year period following the closing of the
Tefron Agreement and the Macpell Agreement, but in such event, the Investor
average sale price must exceed $11.60 per share (rather than $9.22 per share)
for the adjustment to apply.
REGISTRATION RIGHTS AGREEMENT
The Investor entered into a Registration Rights Agreement with Tefron,
Arwol and Macpell on the date of closing with respect to the Ordinary Shares
that the Investor acquired pursuant to the Tefron Agreement and the Macpell
Agreement replacing the existing Registration Rights Agreement.
The Registration Rights Agreement was substantially the same as the
Registration Rights Agreement approved by the shareholders of Tefron and entered
into by Company, Arwol and Macpell in November 2003, other than (i) the
insertion of a new provision granting to the Investor, Arwol and Macpell the
right, once every 18 months, to request a registration on Form F-3 (short form
registration statement) when the aggregate net proceeds from the sale of such
holders' securities is at least $3,000,000, in which event Tefron would be
obligated keep such registration statement effective so as to permit sale of
Ordinary Shares pursuant to the Registration Statement for a period of two
years, subject to certain limitations, and (ii) the amendment of an existing
provision granting to the Investor, Arwol and Macpell the right to request a
registration even though Tefron is not eligible to use Form F-3 (short form
registration statement), in which event Tefron would be obligated to keep such
registration statement effective so as to permit sale of Ordinary Shares
pursuant to the Registration Statement for a period of 120 days, subject to
certain limitations.
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In connection with the execution of the Share Purchase Agreement, in March
2004, with Leber Partners, L.P., which purchased approximately 1.07 million
Ordinary Shares of Tefron, we agreed to enter into a Registration Rights
Agreement with Leber Partners, the Investor under the Tefron Agreement, Arwol
and Macpell. This Registration Rights Agreement replaced, and is on
substantially the same terms as, the Registration Rights Agreement that we
agreed to execute in connection with the Tefron Agreement, other than as
provided below. In addition to the rights to be granted to all of the
shareholders that are to be party to the Registration Rights Agreement, Leber
Partners would have the right to request a registration (even though we would
not be eligible to use a short form registration) of all, but not less than all,
of the Ordinary Shares then held by Leber Partners, but in any event not less
than 500,000 Ordinary Shares. The other shareholders have the right to request
registration if holders of at least 25% of the aggregate number of Ordinary
Shares subject to the agreement at such time request to register a minimum of 5%
of the share capital of Tefron then outstanding, but not less than 500,000
Ordinary Shares. Leber Partners also has the right to request a registration of
all, but not less than all, of the Ordinary Shares then held by it, but in any
event not less than 500,000 Ordinary Shares. If Macpell, Arwol and Norfet
(collectively, the "Principal Holders") intend to distribute the Ordinary Shares
by means of an underwriting, the underwriter will be selected by the Company and
be reasonably acceptable to Principal Holders of a majority of the Ordinary
Shares to be registered. Under certain conditions, the Company may defer
registering such Ordinary Shares for a period not exceeding 180 days. In
addition, the Company would have no obligation to register these shares pursuant
to requests once it has effected three effective registrations pursuant to
requests of Principal Holders.
The Principal Holders also have the right, once every 18 months, to request
a registration on Form F-3 (short form registration statement) when the
aggregate net proceeds from the sale of such holders' securities are at least
$3,000,000. In addition, the Principal Holders also have certain rights to
register their Ordinary Shares for sale at the time the Company registers for
its own account any of its securities in connection with a public offering for
cash (called "piggyback registration").
Under the agreement, the first $50,000 of expenses in connection with
registrations made at the request of one or more Principal Holders will be borne
by the Company, and all expenses in excess of $50,000 will be divided equally
between the Company, on the one hand, and the selling shareholders, on the other
hand. All expenses incurred in connection with "piggyback registrations" will be
borne by the Company, other than underwriting discounts and commissions and
other fees relating to the Ordinary Shares to be sold for the account of the
Principal Holders.
Leber Partners, the Investor, Arwol and Macpell exercised their rights
under the Registration Rights Agreement, and asked for the registration of all
their shares by the Company. Accordingly, on November 29, 2005, the Securities
and Exchange Commission declared effective a Registration Statement on Form F-3
covering the resale of 11,521,259 Ordinary Shares held by Leber Partners, the
Investor, Arwol and Macpell.
MACPELL AGREEMENT
At the same time as the Investor proposed to Tefron to enter into the
Tefron Agreement, the Investor proposed to Arwol to purchase from it an
additional amount of approximately 1.365 million Ordinary Shares at the base
price of $5.538 per share, and concomitantly, and as a condition to the said
purchase, to enter into a shareholders agreement. Arwol offered Macpell to join
it and take part in the sale transaction. Under the terms of the Macpell
Agreement among the Investor, Arwol and Macpell, it was agreed that the base
price for purchase of the shares, would be $5.538 per share and the aggregate
purchase price would be $7,559,370.
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PURCHASE PRICE ADJUSTMENT. The purchase price of $5.538 per share under the
Macpell Agreement was subject to adjustment downwards or upwards on
substantially the same terms as the adjustment of the issue price under the
Tefron Agreement, as described above; provided that if Tefron's EBITDA for 2004
is between $16 million and $23 million, then the share price reduction was to be
calculated in accordance with the following formula:
Price per share = 5.538 - 0.75*[x]
Where x = [(23,000,000 -2004 EBITDA)/1,000,000]/7]
Tefron's EBITDA for 2004 was $11.809 million, and due to purchase price
adjustment, Arwol transferred 106,908 additional Ordinary Shares to Norfet in
April 2005, and Macpell elected to pay Norfet cash in lieu of transferring
additional shares to Norfet.
AGREEMENTS OF THE PARTIES.
COMPOSITION OF THE BOARD OF DIRECTORS. Arwol, Macpell and the Investor
agreed to vote all of Tefron Ordinary Shares owned or controlled by each of them
for the election to Tefron's Board of Directors of: (i) three members (of whom
at least one will qualify as an "independent director" under the NYSE rules)
plus, subject to applicable law - one external director, that shall be nominated
by the Investor (one of whom shall be a woman), (ii) three members (of whom at
least one will qualify as an independent director and a financial expert under
the NYSE rules) plus, subject to applicable law, one external director, that
shall be nominated by Arwol and Macpell, and (iii) Tefron's chief executive
officer.
CHAIRMAN OF THE BOARD OF TEFRON. Arwol, Macpell and the Investor confirm in
the Macpell Agreement that Arie Wolfson agreed to remain as Chairman of the
Board until Tefron's first Annual General Meeting of Shareholders in calendar
year 2005. Subject to the provisions of applicable law, on or before such
shareholders meeting, Arwol, Macpell and the Investor endeavored to agree on the
identity of the Chairman as of and following such shareholders meeting. The
agreement provided that in the event the parties cannot agree on the identity of
the Chairman, each of Arwol and Macpell (taken as a group) and Norfet will be
entitled to designate the Chairman for an 18 month period, provided that Norfet
would be the first to exercise such right for a period commencing on and as of
the Company's first Annual General Meeting of Shareholders in 2005. In November
2005, Arie Wolfson ceased serving as Chairman of the Board, and Ishay Davidi
began serving as Chairman of the Board.
EXECUTIVE COMMITTEE. Arwol, Macpell and the Investor agreed to appoint an
Executive Committee for advisory purposes, comprised of Messrs. Arie Wolfson and
Ishay Davidi (or, an alternate member appointed by Arwol and Macpell (if Arie
Wolfson cannot fulfill his duties) or an alternative member appointed by the
Investor (if Ishay Davidi cannot fulfill his duties). Decisions of the Executive
Committee do not bind Tefron in any way.
RIGHTS OF FIRST OFFER; TAG-ALONG. The Macpell Agreement contains provisions
which require that if Arwol, Macpell or the Investor wishes to transfer Ordinary
Shares of Tefron to a third party, it must first make an offer to transfer the
shares the other parties, subject to certain exceptions. The agreement also
gives the right to the offerees to sell certain of their Company Ordinary Shares
to the proposed purchaser of the Ordinary Shares rather than accepting the offer
from the transferor. Notwithstanding the foregoing, (i) any transfer of shares
to any direct competitor of Tefron or to any controlling shareholder of a direct
competitor will require consent of the other parties to the agreement and (ii)
each of Arwol and Macpell (as a group) and Norfet may sell Tefron shares, in one
or more instances, constituting in the aggregate less than 2.7% of Tefron's
issued and outstanding share capital.
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DRAG ALONG RIGHTS. The Macpell Agreement contains provisions which provide
that if any of Arwol, Macpell or the Investor secures a bona fide offer from any
third party offeror to purchase all of the Ordinary Shares then held by such
party, in cash or publicly traded securities, at a price per share (adjusted for
allocation of dividend, bonus shares, splits etc.) of not less than $10
(provided that such price per share shall not be lower than 80% of the average
of the closing prices of Tefron's shares on the NYSE over the consecutive 60
trading days immediately preceding such sale), and the offeror conditions its
offer on the acquisition of all the shares held by the other two parties to the
Macpell Agreement at such time, such other two parties will be required under
certain conditions to sell all of the shares of Tefron then held by them to such
offeror, at the same price and upon the same terms and conditions as those to
which the sale by the initiator is subject. Notwithstanding the foregoing, in
lieu of selling the shares as described above, the shareholders who receive the
drag along demand may acquire all of the Tefron shares then held by the
initiating shareholder in cash at the price per share and upon the same terms
and conditions as those to which the sale to the offeror would have been
subject.
DISCUSSIONS PRIOR TO MEETINGS. Arwol, Macpell and the Investor agreed in
the Macpell Agreement to meet regularly and in any event prior to each General
Meeting of shareholders of Tefron and to review, discuss and attempt to reach a
unified position with respect to principal issues on the agenda of each such
meeting. The parties clarified that this should not be interpreted as forcing
any party to act or vote according to any position stated at such prior meeting.
DIVIDEND DISTRIBUTION. The parties agreed to formulate a mutually agreeable
dividend distribution policy for Tefron, which policy shall provide for the
distribution of an annual amount, net after taxes (including withholding tax),
of at least $2 million with respect to calendar year 2004, and at least $4.5
million, effective as of calendar year 2005, and they will utilize their best
efforts to cause Tefron to adopt such policy, subject to: (a) the provisions of
applicable law (including NYSE requirements); (b) any undertaking and commitment
made or to be made towards banks and other creditors; (c) the decision of
Tefron's Board of Directors, taking into account Tefron's financial needs,
investments and all other relevant aspects.
MANAGEMENT FEE. Arwol, Macpell and the Investor agreed in the Macpell
Agreement to vote all of Tefron Ordinary Shares owned or controlled by them in
order to cause Tefron (i) to pay the Investor (or any of its affiliates) the
management fees (described above under "6B. Compensation"), and (ii) as of the
date on which Arie Wolfson no longer serves as the Chairman of Tefron's Board of
Directors, to pay Arie Wolfson or his designees for their services to Tefron, an
aggregate annual amount of $120,000.
TERM OF AGREEMENTS OF THE PARTIES. All agreements of Arwol, Macpell and the
Investor described above under "Agreements of the Parties" above will remain in
effect until the fifth anniversary of the closing of the transactions under the
Macpell Agreement. The Investor will cease to have any rights under these
agreements as of the first date on which it holds less than 10% of Tefron's
issued share capital (on a non-diluted basis), and will cease to have any
obligation under these agreements as of the first date on which the Investor
holds less than 5% of Tefron's issued share capital (on a non-diluted basis).
Each of Arwol and Macpell will cease to have any rights under "Agreements of the
Parties" above as of the first date in which they hold (in the aggregate) less
than 10% of Tefron's issued share capital (on a non-diluted basis), and each of
Arwol and Macpell will cease to have any obligation under these agreements as of
the first date on which such party holds less than 5% of Tefron's issued share
capital (on a non-diluted basis).
On April 9, 2007, Macpell sold our shares owned by it in open market
transactions. Accordingly, Macpell and Arwol ceased to be a holder of more than
5% of the voting power of us on April 19, 2007, and Arwol and Macpell no longer
have any rights or obligations under the terms of the agreements of the parties.
OUR CREDIT AGREEMENTS
To finance the acquisition of Tefron USA, we entered into a credit
agreement, dated as of December 13, 1999, with Bank Hapoalim B.M. and the Israel
Discount Bank of New York, as subsequently amended. The Credit Agreement
provided for a tender offer credit facility of up to $70.5 million.
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The Credit Agreement also provides for a seven-year term loan facility of
up to $65.5 million, which was drawn down as a single borrowing at the time of
the merger and amortizes in 11 consecutive semi-annual installments commencing
on January 15, 2002. In addition, the Credit Agreement further provides a
one-year revolving loan facility of up to $5 million. The proceeds from the term
loan facility and the revolving loan facility were used to repay the tender
offer credit facility, which was used initially to finance the acquisition of
Alba and to refinance certain indebtedness of Alba.
SECURITY. The term loan facility and the revolving loan facility are
secured by the following:
o a floating lien on all the personal property of Alba and its
subsidiaries,
o pledges of all non-margin stock of Alba owned by Tefron U.S.
Holdings Corp., the parent company of AWS and a wholly-owned
subsidiary of Tefron, and all subsidiary stock then owned by
Alba, and
o guarantees made by Tefron U.S. Holdings Corp. and any
subsidiaries of Alba, and the continuing guaranty of Tefron.
COVENANTS. Under the terms of the Credit Agreement, Alba and its
subsidiaries are restricted from, among other things, the following:
o incurring additional indebtedness, other than certain permitted
indebtedness;
o creating liens other than certain permitted encumbrances;
o creating or assuming any guarantee obligations other than certain
permitted guarantee obligations;
o merging, consolidating, amalgamating or entering into any other
form of business combination with a third party, or liquidating
or dissolving;
o selling assets, subject to certain exceptions which include sale
of assets in the ordinary course of business or in amounts not
exceeding $250,000 in any twelve-month period;
o declaring or setting aside funds for payment of dividends;
o making capital expenditures, subject to certain exceptions such
as capital expenditures in the ordinary course of business;
o making investments, loans or advances other than as specified; or
o entering into transactions with affiliates unless certain
requirements are satisfied.
The Credit Agreement requires that we maintain certain financial ratios
related to shareholders' equity and operating results. The Credit Agreement also
contains customary events of defaults, including the failure to pay interest or
principal, material breach of any representation or warranty or breach of any
covenant, cross-defaults, bankruptcy, a judgment in excess of $100,000 or a
change in control event relating to Tefron or Alba or its subsidiaries.
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Pursuant to the amendment of our Credit Agreement, the repayment schedule
of the loans will be spread over the period from 2008-2012.
10D. EXCHANGE CONTROLS
Nonresidents of Israel who purchase our Ordinary Shares with U.S. dollars
or other foreign currency will be able to convert dividends (if any) thereon,
and any amounts payable upon the dissolution, liquidation or winding-up of the
affairs of the company, as well as the proceeds of any sale in Israel of the
Ordinary Shares to an Israeli resident, into freely repatriatable dollars, at a
rate of exchange prevailing at the time of conversion, pursuant to regulations,
provided that the Israeli income tax has been withheld with respect to such
amounts, to the extent applicable, or an exemption has been obtained.
10E. TAXATION
The following is a discussion of material United States federal and Israeli
income tax consequences to U.S. Holders (defined below) of Ordinary Shares. This
discussion is based upon existing United States federal and Israeli income tax
laws, including legislation, regulations, administrative rulings and court
decisions, all as in effect on the date of this Annual Report, as well as the
Convention Between the Government of the United States of America and the
Government of the State of Israel With Respect to Taxes on Income (the
"Treaty"). All of these authorities are subject to change (possibly with
retroactive effect) and to differing interpretations.
This summary is for general information only and does not purport to be a
complete analysis of all potential tax consequences of owning Ordinary Shares.
This summary only addresses Ordinary Shares that are held as capital assets
(generally, property held for investment), and does not address all tax
considerations that may be relevant to persons in light of their particular
circumstances, including, for example, persons who hold or at any time have held
(actually or constructively) 10% or more of all classes of voting stock of
Tefron, persons who acquired their Ordinary Shares before the listing of Tefron
shares on the NYSE, persons who acquired their Ordinary Shares pursuant to the
exercise of an employee stock option or otherwise as compensation, and persons
subject to special tax treatment under Israeli or U.S. federal income tax laws,
such as banks and other financial institutions, entities classified as
partnerships for U.S. federal income tax purposes and other pass-through
entities, insurance companies, tax-exempt entities, dealers in securities,
persons holding Ordinary Shares as part of a hedging or conversion transaction
or a straddle, and holders that have a functional currency other than the U.S.
dollar. This summary does not address any aspects of state, local or non-United
States (other than certain Israeli) tax laws, or any estate, gift or other
non-income tax considerations.
For purposes of this discussion, a "U.S. Holder" means a beneficial owner
of Ordinary Shares (i) who is, for U.S. federal income tax purposes:
o a citizen or resident of the United States;
o a corporation (or another entity taxable as a corporation for U.S.
federal income tax purposes) created or organized in the United States or
under the laws of the United States or any political subdivision thereof;
o an estate, the income of which is subject to U.S. federal income tax
regardless of its source; or
o a trust, if a U.S. court is able to exercise primary supervision over the
administration of the trust and one or more U.S. persons have the authority
to control all substantial decisions of the trust, or, if it was in
existence on August 20, 1996, was treated as a U.S. person on the previous
day and has validly elected to continue to be so treated,
68
(ii) who is not a resident of Israel for Israeli income tax purposes, and whose
holding of Ordinary Shares is not in any way related to properties or activities
located in Israel, and (iii) who is fully entitled to the benefits of the Treaty
in respect of the Ordinary Shares.
If an entity that is classified as a partnership for U.S. federal tax
purposes holds Ordinary Shares, the U.S. federal income tax treatment of its
partners will generally depend upon the status of the partners and the
activities of the partnership. Entities that are classified as partnerships for
U.S. federal tax purposes and persons holding Ordinary Shares through such
entities should consult their tax advisors about the income and other tax
consequences of purchasing, owning and disposing of the Ordinary Shares.
ALL PERSONS OWNING OR CONSIDERING AN INVESTMENT IN ORDINARY SHARES
(INCLUDING PERSONS THAT ARE RESIDENT OR OTHERWISE TAXABLE IN COUNTRIES OTHER
THAN THE UNITED STATES) ARE STRONGLY URGED TO CONSULT THEIR OWN TAX ADVISORS AS
TO THE PARTICULAR TAX CONSEQUENCES TO THEM OF AN INVESTMENT IN ORDINARY SHARES
UNDER THE TAX LAWS APPLICABLE TO THEM AND ANY POTENTIAL CHANGES IN THE TAX LAWS.
1. CAPITAL GAINS
U.S. FEDERAL INCOME TAX CONSIDERATIONS. Subject to the discussion below
under "Passive Foreign Investment Company Rules," upon the sale or other taxable
disposition of Ordinary Shares, a U.S. Holder generally will recognize capital
gain or loss equal to the difference between the amount realized on the
disposition and such holder's adjusted tax basis in the Ordinary Shares. Such
capital gain or loss will be long-term gain or loss if, at the time of
disposition, the U.S. Holder's holding period in the Ordinary Shares exceeds one
year. Non-corporate taxpayers are subject to lower tax rates on long-term
capital gains. All taxpayers are subject to certain limitations on the deduction
of capital losses.
Subject to complex conditions and limitations, any Israeli capital gains
tax paid with respect to a disposition of Ordinary Shares (see generally the
discussion below under "-Israeli Tax Considerations") will be a foreign income
tax eligible for credit against a U.S. Holder's U.S. federal income tax
liability (or, alternatively, for deduction against income in determining such
tax liability). In general, gain that a U.S. Holder recognizes on the sale or
other disposition of Ordinary Shares will be U.S. source passive income for
purposes of foreign tax credit limitations, and losses generally will be
allocated against U.S. source income. The rules governing foreign tax credits
are complex, and U.S. Holders should consult their own tax advisors regarding
the availability of foreign tax credits in their particular circumstances.
ISRAELI TAX CONSIDERATIONS. Capital gain tax is imposed on the disposal of
capital assets by an Israeli resident, and on the disposal of such assets by a
non-Israel resident if those assets either (i) are located in Israel; (ii) are
shares or a right to a share in an Israeli resident corporation; or (iii)
represent, directly or indirectly, rights to assets located in Israel. The
Israeli Tax Ordinance distinguishes between "Real Gain" and the "Inflationary
Surplus". Real Gain is the excess of the total capital gain over Inflationary
Surplus computed generally on the basis of the increase in the Israeli CPI
between the date of purchase and the date of disposal.
The capital gain accrued by individuals on the sale of an asset purchased
on or after January 1, 2003 will be taxed at the rate of 20%. However, if the
individual shareholder is a "Significant Shareholder" (I.E., a person who holds,
directly or indirectly, alone or together with others, 10% or more of one of the
Israeli resident company's means of control at the time of sale or at any time
during the preceding 12 month period), such gain will be taxed at the rate of
25%. "Together with another" is defined as together with a relative and together
with an entity that is not a relative, with which cooperation exists in the
regular course of business according to a material agreement in respect of a
corporate entity, directly or indirectly. Furthermore, until the determination
of the directives and conditions for the deduction of real interest expenses
under Section 101 A(A)(9) of the Israeli Tax Ordinance, an individual who claims
real interest and linkage differential expenses with respect to securities will
owe tax at a rate of 25% on real capital gains from the sale of such securities.
The real capital gain derived by a corporation will be generally subject to tax
at the rate of 25%. However, the real capital gain derived from sale of
securities, as defined in Section 6 of the Inflationary Adjustment Law, by a
corporation, which was subject on December 31, 2005 to the provisions of Section
6 of the Inflationary Adjustment Law, will be taxed at the corporate tax rate
(29% in 2007). The Income Tax Law (Inflationary Adjustments), 1985 will be
abolished from the tax year 2008, subject to transitional provisions.
69
The capital gain accrued on the sale of an asset purchased prior to January
1, 2003 will be subject to tax at a blended rate. The marginal tax rate for
individuals (up to 48% in 2007) and the regular corporate tax rate for
corporations (29% in 2007) will be applied to the portion of the gain amount
which bears the same ratio to the total gain realized as the ratio which the
holding period commencing at the acquisition date and terminating on January 1,
2003 bears to the total holding period. The remainder of the gain realized will
be subject to capital gains tax at the rates applicable to an asset purchased
after January 1, 2003 (see aforementioned).
Individual and corporate shareholders dealing in securities in Israel are
taxed at the tax rates applicable to business income (in 2007 - 29% tax rate for
a corporation and a marginal tax rate of up to 49% for individual).
Notwithstanding the foregoing, if the shareholder is a non-Israeli resident,
then such taxation is subject to the provision of any applicable double tax
treaty. Moreover, capital gain derived from the sale of the Shares of an Israeli
company publicly traded on a recognized stock exchange by a non-Israeli
shareholder may be exempt under the Israeli income tax ordinance from Israeli
taxation provided the following cumulative conditions are met: (i) the Shares
were purchased upon or after the registration of the Shares on the stock
exchange, and (ii) the seller doesn't have a permanent establishment in Israel
to which the derived capital gain is attributed. In addition, the sale of the
Shares may be exempt from Israeli capital gain tax under an applicable tax
treaty. Thus, the U.S.-Israel Double Tax Treaty exempts U.S. resident from
Israeli capital gain tax in connection with such sale, provided (i) the U.S.
resident owned, directly or indirectly, less than 10% of an Israeli resident
company's voting power at any time within the 12-month period preceding such
sale; (ii) the seller, being an individual, is present in Israel for a period or
periods of less than 183 days at the taxable year.
U.S. resident purchasers who are unable to benefit from the U.S.-Israel Tax
Treaty may wish to utilize a recently introduced special exemption on capital
gains arising from the sale of shares in an Israeli company (including companies
which are deemed an Israeli resident corporation for tax purposes) between July
1, 2005 and December 31, 2008. In order for this exemption to apply, the
following conditions must be met:
(a) an application is to be submitted to the Israeli Tax Authority at the same
time as the reporting of the sale and capital gain;
(b) the capital gain does not derive from a permanent establishment of the
seller in Israel;
(c) the seller is an individual and has been a resident of a country with which
Israel has a tax treaty (e.g., the U.S.) during the ten continuous years
prior to the acquisition or is an entity where at least 75% of the means of
control of the entity are ultimately held, directly or indirectly, by
individual shareholders who are residents of a country with which Israel
has a tax treaty (e.g., the U.S.) during the ten continuous years prior to
the acquisition. Unless it can be proved otherwise, where the entity is
listed on a non-Israel stock exchange, this condition is deemed to be met
automatically in respect of "non-material" shareholders. "Material" is
defined as a 10% or more holding, directly or indirectly, of any means of
control, together with related parties;
(d) the shares were not purchased from a "related party" (as defined in the
Israeli Tax Ordinance) and Chapter E-2 of the Israeli Tax Ordinance did not
apply to such purchase of shares;
(e) the sale was reported to the tax authority in the country of the seller's
residence; and
(f) within 30 days of the acquisition, the transaction was disclosed in full to
the Israeli Tax Authority.
Shareholders who wish to benefit from this additional exemption would
therefore be advised to approach the Israeli Tax Authority within 30 days of the
purchase of shares in the Company.
In accordance with the Income Tax Regulations (Deduction from Proceeds,
from Payment or from Capital Gain from Sale of Securities or from a Future
Transaction), 2002, or Deduction Regulations, the payer to an individual seller
of consideration for sale of securities will withhold tax at source at the rate
of 20% from the real capital gain subject to tax. The payer to a corporate
entity of consideration for sale of securities will withhold tax at source at
the rate of 25% from the real capital gain. Such payment to a foreign resident
will be exempt from withholding tax at source, as stated, subject to fulfillment
of certain conditions stated in the Deduction Regulations.
Generally, within 30 days of a transaction, a detailed return, including a
computation of the tax due, should be submitted to the Israeli Tax Authority,
and an advanced payment amounting to the tax liability arising from the capital
gain is payable. At the sale of traded securities, the aforementioned detailed
return may not be submitted and the advanced payment should not be paid if all
tax due was withheld at source according to applicable provisions of the Israeli
income tax ordinance and regulations promulgated thereunder. Capital gain is
also reportable on the annual income tax return.
70
2. DISTRIBUTIONS
U.S. FEDERAL INCOME TAX CONSIDERATIONS. Subject to the discussion below
under "Passive Foreign Investment Company Rules," a U.S. Holder generally will
be required to include in gross income, as ordinary dividend income, the amount
of any distributions paid on the Ordinary Shares (including the amount of any
Israeli taxes withheld) to the extent that such distributions are paid out of
Tefron's current or accumulated earnings and profits as determined for U.S.
federal income tax purposes. Distributions in excess of Tefron's earnings and
profits as so determined will be applied against and will reduce the U.S.
Holder's adjusted tax basis in its Ordinary Shares and, to the extent they are
in excess of such tax basis, will be treated as gain from a sale or exchange of
such Ordinary Shares. Subject to certain limitations, "qualified dividend
income" (which dividends paid by Tefron should qualify as) received by a
non-corporate taxpayer generally is currently subject to U.S. federal income tax
at a reduced rate. Dividends paid by Tefron will not qualify for the
dividends-received deduction otherwise available to U.S. corporations.
In the event Tefron pays dividends in a currency other than the U.S.
dollar, such dividends will be includible in the gross income of a U.S. Holder
in a U.S. dollar amount calculated by reference to the exchange rate in effect
on the day they are actually or constructively received by the U.S. Holder
(regardless of whether the U.S. Holder in fact converts the dividends into U.S.
dollars). Any gain or loss resulting from currency exchange fluctuations during
the period from the date the dividend is received to the date such foreign
currency is disposed of will be treated as ordinary income or loss.
Subject to complex conditions and limitations, any Israeli withholding tax
imposed on dividends paid by Tefron (see generally the discussion below under
"-Israeli Tax Considerations") will be a foreign income tax eligible for credit
against a U.S. Holder's U.S. federal income tax liability (or, alternatively,
for deduction against income in determining such tax liability). In general,
dividends will be treated as foreign-source passive income, for foreign tax
credit purposes. There are special rules for computing the foreign tax credit
limitation of a taxpayer who receives dividends that are subject to a reduced
rate of tax. The rules governing foreign tax credits are complex, and U.S.
Holders should consult their own tax advisors regarding the availability of
foreign tax credits in their particular circumstances.
ISRAELI TAX CONSIDERATIONS. A distribution of dividends from income
attributed to an "Approved Enterprise" will be subject to tax in Israel at the
rate of 15%, subject to a reduced rate under any applicable double tax treaty. A
distribution of dividends from income, which is not attributed to an Approved
Enterprise, to an Israeli resident individual will generally be subject to
income tax at a rate of 20%. However, a 25% tax rate will apply if the dividend
recipient is a "Significant Shareholder" (I.E., a person who holds, directly or
indirectly, alone or together with other, 10% or more of one of the Israeli
resident company's means of control at the time of distribution or at any time
during the preceding 12 month period). If the recipient of the dividend is an
Israeli resident corporation, such dividend will be exempt from income tax
provided that the income from which such dividend is distributed was derived or
accrued within Israel.
Under the Israeli income tax ordinance, a non-Israeli resident (either
individual or corporation) is generally subject to an Israeli income tax on the
receipt of dividends at the rate of 20% (25% if the dividends recipient is a
"Significant Shareholder" (as defined above)); those rates are subject to a
reduced tax rate under an applicable double tax treaty. Thus, under the Treaty,
the following rates will apply in respect of dividends distributed by an Israeli
resident company to a U.S. resident: (i) if the U.S. resident is a corporation
which holds during that portion of the taxable year which precedes the date of
payment of the dividend and during the whole of its prior taxable year (if any),
at least 10% of the outstanding shares of the voting stock of the Israeli
resident paying corporation and not more than 25% of the gross income of the
Israeli resident paying corporation for such prior taxable year (if any)
consists of certain type of interest or dividends - the tax rate is 12.5%, (ii)
if both the conditions mentioned in section (i) above are met and the dividend
is paid from an Israeli resident company's income which was entitled to a
reduced tax rate applicable to an "approved enterprise" under the Israeli Law
for the Encouragement of Capital Investments of 1959 - the tax rate is 15%, and
(iii) in all other cases, the tax rate is 25%. The aforementioned rates under
the Treaty will not apply if the dividend income was derived through a permanent
establishment of the U.S. resident in Israel.
An Israeli resident company whose shares are listed on a stock exchange is
obligated to withhold tax, upon the distribution of a dividend attributed to an
Approved Enterprise's income, from the amount distributed, at the following
rates: (i) Israeli resident corporation - 15%, (ii) Israeli resident individual
- - 15%, and (iii) non-Israeli resident - 15%, subject to a reduced tax rate under
an applicable double tax treaty. If the dividend is distributed from income not
attributed to the Approved Enterprise, the following withholding tax rates will
apply: (i) Israeli resident corporation - 0%, (ii) Israeli resident individual -
20% (iii) non-Israeli resident - 20%, subject to a reduced tax rate under an
applicable double tax treaty.
71
3. PASSIVE FOREIGN INVESTMENT COMPANY RULES
For U.S. federal income tax purposes, Tefron will be considered a "passive
foreign investment company" (or "PFIC") if (i) 75% or more of our gross income
for the taxable year is passive income (the "income test") or (ii) the average
percentage of our assets (by value) held during the taxable year that produce
passive income (e.g., dividends, interest, royalties, rents and annuities) or
that are held for the production of passive income is at least 50% (the "asset
test"). A corporation that owns, directly or indirectly, at least 25% by value
of the stock of a second corporation must take into account its proportionate
share of the second corporation's income and assets in applying the income test
and the asset test.
Based on current projections concerning the composition of Tefron's income
and assets, Tefron does not believe that it will be treated as a PFIC for its
current or future taxable years. However, because this conclusion is based on
our current projections and expectations as to future business activity, Tefron
can provide no assurance that it will not be treated as a PFIC in respect of its
current or any future taxable years.
If Tefron is treated as a PFIC for any taxable year during which a U.S.
Holder holds Ordinary Shares, then, subject to the discussion of the qualified
electing fund ("QEF") and "mark-to-market" rules below, such U.S. Holder
generally will be subject to a special and adverse U.S. income tax regime with
respect to any gain realized on the disposition of the Ordinary Shares and with
respect to certain "excess distributions" received from Tefron. The adverse tax
consequences include taxation of such gain or excess distribution at
ordinary-income rates and the imposition of an interest charge on tax
liabilities with respect to such gain or excess distributions.
In some circumstances, a U.S. Holder may avoid certain of the unfavorable
consequences of the PFIC rules by making a QEF election in respect of Tefron. A
QEF election effectively would require an electing U.S. Holder to include in
income currently its pro rata share of the ordinary earnings and net capital
gain of Tefron. However, a U.S. Holder cannot elect QEF status with respect to
Tefron unless Tefron complies with certain reporting requirements and there can
be no assurance that Tefron will provide such information.
A U.S. Holder that holds "marketable" stock in a PFIC may also avoid
certain unfavorable consequences of the PFIC rules by, instead of making a QEF
election, electing to mark the PFIC stock to market at the close of each taxable
year. Tefron expects that the Ordinary Shares will be "marketable" for this
purpose. A U.S. Holder that makes the mark-to-market election will be required
to include in income each year as ordinary income an amount equal to the excess,
if any, of the fair market value of the stock at the close of the year over the
U.S. Holder's adjusted tax basis in the stock. If, at the close of the year, the
U.S. Holder's adjusted tax basis exceeds the fair market value of the stock,
then the U.S. Holder may deduct any such excess from ordinary income, but only
to the extent of net mark-to-market gains previously included in income. Any
gain from the actual sale of the PFIC stock will be treated as ordinary income,
and any loss will be treated as ordinary loss to the extent of net
mark-to-market gains previously included in income.
4. U.S. BACKUP WITHHOLDING AND INFORMATION REPORTING
A U.S. Holder may be subject to U.S. Internal Revenue Service information
reporting and U.S. backup withholding with respect to dividends received with
respect to Ordinary Shares and proceeds from the sale of Ordinary Shares, unless
the U.S. Holder is a corporation or within certain exempt categories and
demonstrates that fact when so required, or (in the case of backup withholding
only) furnishes a correct taxpayer identification number and makes the required
certifications.
U.S. backup withholding is not an additional tax. Any amount withheld under
the backup withholding rules will be allowed as a credit against the U.S.
Holder's U.S. federal income tax liability and may entitle such U.S. Holder to a
refund, provided the required information is timely furnished to the Internal
Revenue Service.
72
10F. DIVIDENDS AND PAYMENT AGENTS
Not Applicable.
10G. STATEMENTS BY EXPERTS
Not Applicable.
10H. DOCUMENTS ON DISPLAY
We are currently subject to the information and periodic reporting
requirements of the Securities Exchange Act of 1934, as amended. Our SEC filings
are available for inspection and copying at the public reference facilities
maintained by the Commission in Room 1024, 450 Fifth Street, N.W. Washington,
D.C. 20549, and the Commission's regional offices located in New York, New York
and Chicago, Illinois. Please call the Commission at 1-800-SEC-0330 for further
information on the public reference rooms.
As a foreign private issuer, we are exempt from the rules under the
Securities Exchange Act of 1934, as amended, prescribing the furnishing and
content of proxy statements to shareholders. Certain of our SEC filings are also
available to the pubic on the SEC website at http://www.sec.gov. Because we are
a foreign private issuer, we, our directors and our officers are also exempt
from the shortswing profit recovery and disclosure regime of section 16 of the
Exchange Act.
10I. SUBSIDIARY INFORMATION
Not Applicable.
ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
FOREIGN CURRENCY RISK
Our operating expenses are influenced by changes in the exchange rates
between the dollar and foreign currencies, especially the NIS. Our operational
expenses increase when the dollar is devalued against such currencies. At
December 31, 2007, our liabilities denominated in foreign currencies in the
amount of $30.2 million represented 40.8% of our total liabilities of $74.0
million. At December 31, 2007, our assets denominated in foreign currencies in
the amount of $15.7 million represented 9.7% of our total assets of $162.5
million. In 2007, the average amount of our net liabilities denominated in NIS
was approximately $13 million. Based on such amount, a depreciation of the
dollar in relation to NIS in the amount of 10% would cause us to incur annual
expenses in the amount of approximately $1.3 million. Due to the appreciation of
the NIS vis-a-vis the dollar in 2007, we incurred gross expenses of
approximately $1.0 million in 2007. This amount does not take into account
hedging transactions performed by the Company during 2007, which diminished the
adverse effect of the appreciation of the NIS in relation to the dollar. This
appreciation may continue in 2008.
Additionally, a portion of our sales is denominated in Euros. The dollar
value of these sales increases when the dollar depreciates against the Euro. We
may from time to time utilize derivative financial instruments to manage risk
exposure to fluctuations in foreign exchange rates. Accordingly, in 2007,
forward exchange contracts were designated as hedging instrument. We do not
engage in any speculative or profit motivated forward or derivatives activities.
See "Item 3. Key Information - 3D. Risk Factors" and "Item 5. Operating and
Financial Review and Prospects - Impact of Inflation and Currency Fluctuations.
73
Most of our sales are denominated in U.S. dollars, and we incur most of our
expenses in U.S. dollars and in NIS. According to the salient economic factors
indicated in SFAS No. 52, "Foreign Currency Translation," our cash flow, sale
price, sales market, expense, financing and intercompany transactions and
arrangement indicators are predominately denominated in U.S. dollars. In
addition, the U.S. dollar is the primary currency of the economic environment in
which we operate, and thus the U.S. dollar is our functional and reporting
currency.
In our balance sheet, we re-measure into U.S. dollars all monetary accounts
(principally cash and cash equivalents and liabilities) that are maintained in
other currencies. For this re-measurement, we use the foreign exchange rate at
the balance sheet date. Any gain or loss that results from this re-measurement
is reflected in the statement of income as financial income or financial
expense, as appropriate.
We measure and record non-monetary accounts in our balance sheet
(principally fixed assets, prepaid expenses and share capital) in U.S. dollars,
and we do the same with operational accounts. For this measurement, we use the
U.S. dollar value in effect at the date that the asset or liability was
initially recorded in our balance sheet (the date of the transaction).
In managing our foreign exchange risk, from time to time we enter into
various foreign exchange hedging contracts. Our policy is to hedge significant
net exposures in the major foreign currencies in which we operate. We attempt to
limit our exposure resulting from liabilities and anticipated expenses that are
denominated in NIS through forward contracts. We monitor foreign exchange rates
and trends periodically to measure the effectiveness of our foreign currency
hedging. If our forward contracts meet the definition of a hedge and are so
designated, changes in the fair value of the contracts will be:
o offset against changes in the fair value of the hedged assets or
liabilities through earnings, or
o recognized in other comprehensive income until the hedged item is
recognized in earnings.
In addition to forwards, we use the "cylinder strategy" (purchasing puts
options on the U.S. dollar, usually together with writing call options on the
U.S. dollar at a higher exchange rate). In order to reduce costs we also use
"knock-in" strategies.
As of December 31, 2007, there were no gains or losses recognized in
earnings for hedge ineffectiveness. As of December 31, 2007, we had outstanding
forward contracts and put options in the amount of $38.0 million. We enter into
forward contracts only with well-established institutions, and therefore we
believe that the liabilities that were owed to us at December 31, 2007 will be
realized. In the event that forward contracts were to become unavailable to us
for a period of time and the dollar were devalued against foreign currencies,
our operational expenses would increase by an amount corresponding to the
devaluation of the dollar as a result of our inability to hedge changes in
exchange rates.
INTEREST RATE RISK
Of our dollar-denominated financial liabilities at December 31, 2007, $19.3
million were loans denominated in dollar bearing interest at LIBOR. As a result,
our interest expenses are sensitive to changes in LIBOR.
Our dollar-denominated financial liabilities bear interest at 1.2% to 1.5%
over LIBOR. A hypothetical ten percent shift in interest rates would result in a
decrease (or increase) in net income of approximately $0.1 million. In 2008, we
entered into an improved financing arrangement with our bank creditors. The
annual interest rate was reduced to three-month LIBOR plus 1.0%. Additionally,
we converted loans at the principal amount of $6.0 million held at U.S banks
into new loans received from our Israeli banks with longer repayment terms.
74
ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
Not Applicable.
PART II
ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
None.
ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF
PROCEEDS
14A. TO E. Not Applicable.
ITEM 15. CONTROLS AND PROCEDURES
(a) DISCLOSURE CONTROLS AND PROCEDURES. As of the end of the period covered
by this report, we performed an evaluation of the effectiveness of our
disclosure controls and procedures that are designed to ensure that the material
financial and non-financial information required to be disclosed in the report
that it files or submits under the Securities Exchange Act of 1934 is recorded,
processed, summarized and reported within the time periods specified in the
SEC's rules and forms. Disclosure controls and procedures include, without
limitation, controls and procedures designed to ensure that information required
to be disclosed by an issuer in the reports that it files or submits under the
Securities Act of 1933, as amended, is accumulated and communicated to the our
management, including our principal executive and principal financial officers,
or persons performing similar functions, as appropriate to allow timely
decisions regarding required disclosure. There can be no assurance that our
disclosure controls and procedures will detect or uncover all failures of
persons within Tefron to disclose material information otherwise required to be
set forth in our reports. Nevertheless, our disclosure controls and procedures
are designed to provide reasonable assurance of achieving the desired control
objectives. Based on our evaluation, our management, including our Chief
Executive Officer and Chief Financial Officer, have concluded that our
disclosure controls and procedures (as defined in Rules 13a-15(e) and 15(d) -
15(e) of the Securities Exchange Act of 1934, as amended) as of the end of the
period covered by this report are effective at such reasonable assurance level.
(b) MANAGEMENT'S ANNUAL REPORT ON INTERNAL CONTROL OVER FINANCIAL
REPORTING. Our management is responsible for establishing and maintaining
adequate internal control over financial reporting as defined in Rules 13a-15(f)
and 15d-15(f) under the Exchange Act. Our internal control over financial
reporting is a process to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of financial statements for external
purposes in accordance with U.S generally accepted accounting principles. Our
internal control over financial reporting includes those policies and procedures
that:
o pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of our
assets
o provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in accordance
with generally accepted accounting principles, and that our receipts
and expenditures are being made only in accordance with authorizations
of our management and directors
o provide reasonable assurance regarding prevention or timely detection
of unauthorized acquisition, use or disposition of our assets that
could have a material effect on the financial statements.
75
Our management recognizes that there are inherent limitations in the
effectiveness of any system of internal control over financial reporting,
including the possibility of human error and the circumvention or override of
internal control. Accordingly, even effective internal control over financial
reporting can provide only reasonable assurance with respect to financial
statement preparation, and may not prevent or detect all misstatements. Further,
because of changes in conditions, the effectiveness of internal control over
financial reporting may vary over time.
Our management assessed the effectiveness of our internal control over
financial reporting as of December 31, 2007. In conducting its assessment of
internal control over financial reporting, management based its evaluation on
the framework in "Internal Control - Integrated Framework" issued by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO). Our
management has concluded based on its assessment, that our internal control over
financial reporting was effective as of December 31, 2007 based on these
criteria.
(c) Kost, Forer Gabbay & Kasierer in Israel, a member of Ernst &
Young Global, which has audited the financial statements included in this Annual
Report on Form 20-F, has issued an attestation report on management's assessment
of the Company's internal control over financial reporting; their report is
included in Item 18.
(d) CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING. There were no
changes in our internal control over financial reporting that occurred during
the year ended December 31, 2007 that have materially affected, or are
reasonably likely to materially affect, our internal control over financial
reporting.
ITEM 16. [RESERVED]
16A. AUDIT COMMITTEE FINANCIAL EXPERT
The Board of Directors has determined that Micha Korman is an "audit
committee financial expert" as defined in Item 16A of Form 20-F. Mr. Korman is
an "independent" director in accordance with applicable NYSE and SEC
regulations.
16B. CODE OF ETHICS
We have adopted a code of ethics that applies to our Chief Executive
Officer, Chief Financial Officer, Corporate Controller and employees. This code
of ethics is posted on our website, www.tefron.com, and may be found as follows:
1. From our main web page, first click on the "meet tefron" bar on the
left.
2. Next, click on "code of business ethics" on the bottom.
76
16C. ACCOUNTANTS' FEES AND SERVICES
The following table presents the aggregate fees for professional services
and other services rendered by Kost, Forer Gabbay & Kasierer in Israel, a member
of Ernst & Young Global to Tefron in 2007 and 2006.
US$ 2007 US$ 2006
-------- --------
Audit Fees $233,000 $103,858
Audit-related Fees $ 12,000 --
Tax Fees $ 42,000 $ 63,522
All Other Fees -- $ 32,005
TOTAL $287,000 $199,385
Audit Fees consist of fees billed for the annual audit services engagement
and other audit services, which are those services that only the external
auditor can reasonably provide, and include the group audit; statutory audits;
comfort letters and consents; attest services; and assistance with and review of
documents filed with the SEC.
Audit-related Fees consist of fees billed for assurance and related
services that are reasonably related to the performance of the audit or review
of our financial statements or that are traditionally performed by the external
auditor, and include consultations concerning financial accounting and reporting
standards.
Tax Fees include fees billed for tax compliance services, including the
preparation of original and amended tax returns and claims for refund; tax
consultations, such as assistance and representation in connection with tax
audits, tax advice related to mergers and acquisitions, transfer pricing, and
requests for rulings or technical advice from taxing authority.
All Other Fees include fees billed for training; forensic accounting; data
security reviews; treasury control reviews and process improvement and advice;
environmental, sustainability and advisory services.
AUDIT COMMITTEE PRE-APPROVAL POLICIES AND PROCEDURES
Tefron's audit committee's main role is to assist the Board of Directors in
fulfilling its responsibility for oversight of the quality and integrity of the
accounting, auditing and reporting practices of the Company. The Audit Committee
oversees the appointment, compensation, and oversight of the public accounting
firm engaged to prepare or issue an audit report on the financial statements of
the Company. The audit committee's specific responsibilities in carrying out its
oversight role include the approval of all audit and non-audit services to be
provided by the external auditor and quarterly review the firm's non-audit
services and related fees. These services may include audit services,
audit-related services, tax services and other services, as described above. The
audit committee approves in advance the particular services or categories of
services to be provided to the Company during the following yearly period and
also sets forth a specific budget for such audit and non-audit services.
Additional services may be pre-approved by the audit committee on an individual
basis during the year.
During 2007, none of Audit-related Fees, Tax Fees or Other Fees provided to
us by Kost, Forer Gabbay & Kasierer in Israel or by Ernst & Young or McGladrey &
Pullen, LLP in the United States were approved by the Audit Committee pursuant
to the de minimis exception to the pre-approval requirement provided by
paragraph (c)(7)(i)(C) of Rule 2-01 of Regulation S-X.
16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES.
None.
16E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS.
None.
77
PART III
ITEM 17. FINANCIAL STATEMENTS
We have responded to Item 18 in lieu of this Item.
ITEM 18. FINANCIAL STATEMENTS
Our Consolidated Financial Statements beginning on pages F-1 through F-43,
as set forth in the following index, are hereby incorporated herein by
reference. These Consolidated Financial Statements are filed as part of this
Annual Report.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
----
Index to Consolidated Financial Statements F-1
Reports of Independent Registered Public Accounting Firm F-2 - F-3
Consolidated Balance Sheets F-4 - F-5
Consolidated Statements of Operations F-6
Consolidated Statements of Changes in Shareholders' Equity F-7 - F-9
Consolidated Statements of Cash Flows F-10 - F-12
Notes to the Consolidated Financial Statements F-13 - F-43
Report of Independent Auditors for Alba Health LLC 2005 and 2004
Financial Statements F-44
78
ITEM 19. EXHIBITS
1.1. Memorandum of Association of the Company (incorporated by
reference to Exhibit 3.1 to the Company's Registration Statement
on Form F-1 (No. 333-7538) filed on August 29, 1997).
1.2. Amended and Restated Articles of Association of the Company
(incorporated by reference to Exhibit 2.1 to the Company's Annual
Report on Form 20-F for the fiscal year ended December 31, 2006)
1.3. Amendment to Amended and Restated Articles of Association.
2.1. Form of Credit Agreement, dated as of December 13, 1999, among
AWS Acquisition Corp., Israel Discount Bank of New York and Bank
Hapoalim B.M., New York Branch as Administrative Agent
(incorporated by reference to Exhibit 99(b)(2) to Amendment No. 2
to Schedule 14D-1 in respect of Alba-Waldensian, Inc. filed by
the Company on December 13, 1999).
2.2 Letter, dated March 2, 2004, from Israel Discount Bank Ltd. to
the Company regarding shareholders' equity requirements under the
Credit Agreement (incorporated by reference to Exhibit 2.8 to the
Company's Annual Report on Form 20-F for the fiscal year ended
December 31, 2003).
2.3 Letter, dated March 2, 2004, from Bank Hapoalim to the Company
regarding shareholders' equity requirements under the Credit
Agreement (incorporated by reference to Exhibit 2.9 to the
Company's Annual Report on Form 20-F for the fiscal year ended
December 31, 2003).
2.4 Letter, dated February 16, 2004, from Israel Discount Bank to the
Company regarding revised repayment schedule and revised
shareholders' equity requirements under the Credit Agreement
(incorporated by reference to Exhibit 2.10 to the Company's
Annual Report on Form 20-F for the fiscal year ended December 31,
2003).
2.5 Letter, dated February 15, 2004, from Bank Hapoalim to the
Company regarding revised repayment schedule under the Credit
Agreement (incorporated by reference to Exhibit 2.11 to the
Company's Annual Report on Form 20-F for the fiscal year ended
December 31, 2003).
2.6 Letter, dated March 31, 2004, from Bank Hapoalim to the Company
regarding revised shareholders' equity requirements under the
Credit Agreement (incorporated by reference to Exhibit 2.12 to
the Company's Annual Report on Form 20-F for the fiscal year
ended December 31, 2003).
2.7 Sixth Amendment to Credit Agreement, dated December 15, 2004,
among Alba-Waldensian, Inc. and Bank Hapoalim, as Agent and
Lender, together with Term B Notes (incorporated by reference to
Exhibit 2.7 to the Company's Annual Report on Form 20-F for the
fiscal year ended December 31, 2004).
2.8 Loan Agreement, dated as of December 21, 2004, between Israel
Discount Bank and Hi-Tex Founded by Tefron Ltd (incorporated by
reference to Exhibit 2.12 to the Company's Annual Report on Form
20-F for the fiscal year ended December 31, 2004).
2.9 Loan Agreement, dated as of December 31, 2004, between Bank
Hapoalim and Hi-Tex Founded by Tefron Ltd (incorporated by
reference to Exhibit 2.13 to the Company's Annual Report on Form
20-F for the fiscal year ended December 31, 2004).
79
2.10 Loan Agreement, dated as of December 25, 2004, between Israel
Discount Bank and the Company (incorporated by reference to
Exhibit 2.14 to the Company's Annual Report on Form 20-F for the
fiscal year ended December 31, 2004).
2.11 Loan Agreement, dated as of December 31, 2004, between Bank
Hapoalim and the Company (incorporated by reference to Exhibit
2.15 to the Company's Annual Report on Form 20-F for the fiscal
year ended December 31, 2004).
4.1 Management and Services Agreement, effective as of July 30, 2003,
between the Company, Yosef Shiran and Shiran & Partners -
Consulting, Entrepreneurship, and Financing (incorporated by
reference to Exhibit 4.4 to the Company's Annual Report on Form
20-F for the fiscal year ended December 31, 2003).
4.2 Letter, dated March 28, 2007, from General Counsel of Company to
Mr. Yosef Shiran re: amendments to Management and Services
Agreement (incorporated by reference to Exhibit 4.4 to the
Company's Annual Report on Form 20-F for the fiscal year ended
December 31, 2006).
4.3 Lease Agreement dated as of August 12, 1997, between the Company
and New Net Assets (1994) Ltd. and an Assignment Agreement dated
as of December 25, 1998 between the Company and Hi-Tex Founded by
Tefron Ltd. The Company and/or its subsidiary, Hi-Tex Founded by
Tefron Ltd., have entered in to similar lease agreements with New
Net Assets (1994) Ltd. (incorporated by reference to Exhibit 4.5
to the Company's Annual Report on Form 20-F for the fiscal year
ended December 31, 2001).
4.4 Membership Interest Redemption Agreement, dated April 26, 2006,
by and between AlbaHealth, LLC and Tefron USA, Inc. (incorporated
by reference to Exhibit 4.6 to the Company's Annual Report
on Form 20-F for the fiscal year ended December 31, 2006).
4.5 Subordination Agreement, dated April 26, 2006, by Tefron USA,
Inc. in favor of Suntrust Bank, in its capacity as administrative
agent for the lenders from time to time party to the Senior
Credit Agreement (incorporated by reference to Exhibit 4.7 to
the Company's Annual Report on Form 20-F for the fiscal year
ended December 31, 2006).
4.6 Unsecured Subordinated Promissory Note in the principal amount of
US $3 million, dated April 26, 2006, by AlbaHealth LLC. in favor
of Tefron USA, Inc. (incorporated by reference to Exhibit 4.8
to the Company's Annual Report on Form 20-F for the fiscal
year ended December 31, 2006)
4.7 Share Purchase Agreement dated February 17, 2004, by and between
the Company and Norfet Limited Partnership, including related
Registration Rights Agreement attached as a schedule
(incorporated by reference to Exhibit 4.9 to the Company's Annual
Report on Form 20-F for the fiscal year ended December 31, 2003).
4.8 Amendment to Purchase Agreement, dated March 31, 2005, by and
between the Company and Norfet Limited Partnership (incorporated
by reference to Exhibit 4.11 to the Company's Annual Report on
Form 20-F for the fiscal year ended December 31, 2004).
4.9 Share Purchase Agreement, made as of March 3, 2004, by and
between Tefron and Leber Partners, L.P, including related
Registration Rights Agreement attached as a schedule
(incorporated by reference to Exhibit 4.10 to the Company's
Annual Report on Form 20-F for the fiscal year ended December 31,
2003).
4.10 Agreement, dated as of July 5, 2006, between Macpell Industries
Ltd. and the Company regarding the lease of properties
(incorporated by reference to Exhibit 4.15 to the Company's
Annual Report on Form 20-F for the fiscal year ended December
31, 2006).
4.11 Joint Venture Agreement, dated as of May 8, 2006, by and between
the Company, Langsha Knitting Co. Ltd. and Itochu Textile
Materials (Asia) Ltd. (incorporated by reference to Exhibit
4.16 to the Company's Annual Report on Form 20-F for the
fiscal year ended December 31, 2006).
8.1 List of subsidiaries of the Company (incorporated by reference
to Exhibit 8.1 to the Company's Annual Report on Form 20-F
for the fiscal year ended December 31, 2006).
80
12.(a).1 Certification by CEO pursuant to Rule 13a-14(a) or Rule 15d-14(a)
of the Securities Exchange Act of 1934, as adopted pursuant to
Section 302 of the Sarbanes Oxley Act of 2002.
12.(a).2 Certification by CFO pursuant to Rule 13a-14(a) or Rule 15d-14(a)
of the Securities Exchange Act of 1934, as adopted pursuant to
Section 302 of the Sarbanes Oxley Act of 2002.
13.(a).1 Certification of CEO and CFO pursuant to 18 U.S.C. Section 1350,
as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
14.(a).1 Consent of Kost, Forer Gabbay & Kasierer, a member of Ernst &
Young Global.
14.(a).2 Consent of McGladrey & Pullen, LLP.
81
TEFRON LTD. AND ITS SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2007
U.S. DOLLARS IN THOUSANDS
TEFRON LTD. AND ITS SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2007
U.S. DOLLARS IN THOUSANDS
INDEX
PAGE
---------------
REPORTS OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM F-2 - F-3
CONSOLIDATED BALANCE SHEETS F-4 - F-5
CONSOLIDATED STATEMENTS OF INCOME F-6
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY F-7 - F-9
CONSOLIDATED STATEMENTS OF CASH FLOWS F-10 - F-12
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS F-13 - F-43
REPORT OF INDEPENDENT AUDITORS FOR ALBA HEALTH LLC.
TO 2005 AND 2004 FINANCIAL STATEMENTS F-44
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF
TEFRON LTD.
We have audited the accompanying consolidated balance sheets of Tefron Ltd.
("the Company") and its subsidiaries as of December 31, 2006 and 2007, and the
related consolidated statements of Income, changes in shareholders' equity and
cash flows for each of the three years in the period ended December 31, 2007.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We did not audit the financial statements of Alba Health LLC ("Alba
Health"), a former subsidiary in which the Company sold its interest on April
27, 2006, whose revenues constitute 16.7% of total consolidated revenues for the
year ended December 31, 2005. Those statements were audited by other auditors
whose reports have been furnished to us, and our opinion, insofar, as it relates
to amounts included for Alba Health, is based solely on the reports of the other
auditors.
We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, based on our audits and the reports of other auditors, the
consolidated financial statements referred to above present fairly, in all
material respects, the consolidated financial position of the Company and its
subsidiaries as of December 31, 2006 and 2007, and the consolidated results of
their operations and their cash flows for each of the three years in the period
ended December 31, 2007, in conformity with accounting principles generally
accepted in the United States.
As discussed in Notes 2p and 2o to the consolidated financial statements,
the Company adopted the provisions of Statement of Financial Accounting Standard
No. 123(R), "Shared-Based Payment" and the provisions of Statement of Financial
Accounting Standard Interpretation No. 48 "Accounting for Uncertainty In Income
Taxes" , effective January 1, 2006 and 2007, respectively.
We also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the Company and subsidiaries'
internal control over financial reporting as of December 31, 2007, based on
criteria established in Internal Control-Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission and our report
dated March 26, 2008 expressed an unqualified opinion thereon
Haifa, Israel KOST FORER GABBAY & KASIERER
March 26, 2008 A Member of Ernst & Young Global
F - 2
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF
TEFRON LTD.
We have audited Tefron Ltd.'s (the "Company") and its subsidiaries internal
control over financial reporting as of December 31, 2007, based on criteria
established in Internal Control-Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission (the "COSO criteria"). The
Company's management is responsible for maintaining effective internal control
over financial reporting and for its assessment of the effectiveness of internal
control over financial reporting. Our responsibility is to express an opinion on
the Company's internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether
effective internal control over financial reporting was maintained in all
material respects. Our audit included obtaining an understanding of internal
control over financial reporting, assessing the risk that a material weakness
exists, testing and evaluating the design and operating effectiveness of
internal control based on the assessed risk, and performing such other
procedures as we considered necessary in the circumstances. We believe that our
audit provides a reasonable basis for our opinion.
A company's internal control over financial reporting is a process designed
to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the
degree of compliance with the policies or procedures may deteriorate.
In our opinion, the Company maintained in all material respects, effective
internal control over financial reporting as of December 31, 2007, based on the
COSO criteria.
We also have audited, in accordance with the standards of the Public
Company Accounting Oversight Board (United States), the consolidated balance
sheets of Tefron Ltd. and subsidiaries as of December 31, 2006 and 2007, and the
related consolidated statements of income, changes in shareholders' equity and
cash flows for each of the three years in the period ended December 31, 2007 and
our report dated March 26, 2008 expressed an unqualified opinion thereon.
Haifa, Israel KOST FORER GABBAY & KASIERER
March 26, 2008 A Member of Ernst & Young Global
F - 3
TEFRON LTD. AND ITS SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS
DECEMBER 31,
-----------------------
NOTE 2007 2006
-------- -------- --------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 2,384 $ 3,966
Short term deposits 7,063 10,089
Marketable securities 3 5,668 4,975
Trade receivables (net of allowances for doubtful debts of
$ 183 and $ 172 at December 31, 2006 and 2007, respectively) 29,033 30,655
Other accounts receivable and prepaid expenses 4 5,404 4,166
Inventories 5 32,577 28,912
-------- --------
TOTAL current assets 82,129 82,763
-------- --------
LONG TERM INVESTMENTS:
Bank deposit - 1,029
Marketable securities 3 1,284 -
Severance pay fund 1,288 778
Subordinate note 1c 3,000 3,000
-------- --------
TOTAL long term investments 5,572 4,807
-------- --------
PROPERTY, PLANT AND EQUIPMENT, NET 6 74,791 77,086
-------- --------
TOTAL assets $162,492 $164,656
======== ========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED
FINANCIAL STATEMENTS.
F - 4
TEFRON LTD. AND ITS SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA
DECEMBER 31,
--------------------------
NOTE 2007 2006
--------- --------- ---------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term bank loans 8 $ 5,948 $ 5,948
Trade payables 29,720 31,143
Other accounts payable and accrued expenses 7 8,635 10,402
--------- ---------
TOTAL current liabilities 44,303 47,493
--------- ---------
LONG-TERM LIABILITIES:
Long-term loans from banks (net of current maturities) 8 13,374 19,322
Deferred taxes liabilities 12 12,397 12,313
Accrued severance pay 3,882 3,298
--------- ---------
TOTAL long-term liabilities 29,653 34,933
--------- ---------
LIENS, CONTINGENCIES AND COMMITMENTS 9
SHAREHOLDERS' EQUITY: 10
Share capital -
Ordinary shares of NIS 1 par value - Authorized: 49,995,500
shares; Issued: 21,747,568 and 22,200,386 shares at
December 31, 2006 and 2007, respectively; Outstanding:
20,750,168 and 21,202,986 shares at December 31, 2006 and 2007,
respectively 7,518 7,411
Additional paid-in capital 106,530 101,684
Cumulative other comprehensive income 368 55
Accumulated deficit (18,472) (19,512)
Less - 997,400 Ordinary shares in treasury, at cost (7,408) (7,408)
--------- ---------
TOTAL shareholders' equity 88,536 82,230
--------- ---------
TOTAL liabilities and shareholders' equity $ 162,492 $ 164,656
========= =========
March 26, 2008
- ------------------------ -------------------------- --------------------------- --------------------------
Date of approval of the Jacob Gelbard Yosef Shiran Asaf Alperovitz
financial statements Chairman CEO and Director CFO
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED
FINANCIAL STATEMENTS.
F - 5
TEFRON LTD. AND ITS SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
- --------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA
YEAR ENDED DECEMBER 31,
---------------------------------------------------
NOTE 2007 2006 2005
---------- ------------ ------------ ------------
Sales $ 158,614 $ 188,104 $ 171,336
Cost of sales 11a 139,147 145,144 141,621
------------ ------------ ------------
Gross profit 19,467 42,960 29,715
Selling and marketing expenses 12,443 11,573 8,984
General and administrative expenses 5,272 5,504 4,595
------------ ------------ ------------
Operating income 1,752 25,883 16,136
Financial expenses, net 11b 1,289 1,912 3,189
------------ ------------ ------------
Income before taxes on income 463 23,971 12,947
Taxes (tax benefit) on income 13e (20) 5,711 4,297
------------ ------------ ------------
Net Income from continuing operations 483 18,260 8,650
Net Income (loss) from discontinued operations - 120 (5,357)
------------ ------------ ------------
Net income $ 483 $ 18,380 $ 3,293
============ ============ ============
Basic and diluted net earnings per share from continuing
operations:
Basic net earnings per share $ 0.02 $ 0.90 $ 0.49
============ ============ ============
Diluted net earnings per share $ 0.02 $ 0.88 $ 0.47
============ ============ ============
Basic and diluted net earnings (losses) per share from
discontinued operations:
Basic net earnings (losses) per share $ - $ 0.01 $ (0.30)
============ ============ ============
Diluted net earnings (losses) per share $ - $ 0.01 $ (0.29)
============ ============ ============
Basic and diluted net earnings per share:
Basic net earnings per share $ 0.02 $ 0.91 $ 0.19
============ ============ ============
Diluted net earnings per share $ 0.02 $ 0.89 $ 0.18
============ ============ ============
Weighted average number of shares used for computing
basic earnings per share 21,188,161 20,210,722 17,719,275
============ ============ ============
Weighted average number of shares used for computing
diluted earnings per share 21,630,124 20,754,566 18,542,618
============ ============ ============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED
FINANCIAL STATEMENTS.
F - 6
TEFRON LTD. AND ITS SUBSIDIARIES
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
- -------------------------------------------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS
CUMULATIVE
ADDITIONAL DEFERRED OTHER TOTAL TREASURY
ORDINARY PAID-IN STOCK-BASED COMPREHENSIVE ACCUMULATED COMPREHENSIVE SHARES, AT
SHARES CAPITAL COMPENSATION INCOME DEFICIT INCOME COST TOTAL
-------- -------- -------- -------- -------- ---------- -------- --------
Balance as of January 1, 2005 $ 6,582 $ 79,243 $ (486) $ - $(31,188) $ (7,408) $ 46,743
Settlement of the conditional
obligation with respect to issuance
of shares 200 3,254 - - - - 3,454
Exercise of stock options related to
employees and directors 28 428 - - - - 456
Cancellation of deferred shares - 1 - - - - 1
Deferred stock-based compensation - 143 (143) - - - -
Amortization of deferred stock-based
compensation - - 431 - - - 431
Comprehensive income:
Unrealized gain on hedging
derivatives - - - 307 - $ 307 - 307
Net income - - - - 3,293 3,293 - 3,293
-------- -------- -------- -------- -------- ---------- -------- --------
Total comprehensive income $ 3,600
==========
Balance as of December 31, 2005 $ 6,810 $ 83,069 $ (198) $ 307 $(27,895) $ (7,408) $ 54,685
-------- -------- -------- -------- -------- -------- --------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED
FINANCIAL STATEMENTS.
F - 7
TEFRON LTD. AND ITS SUBSIDIARIES
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (CONT.)
- --------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS
CUMULATIVE
ADDITIONAL DEFERRED OTHER TOTAL TREASURY
ORDINARY PAID-IN STOCK-BASED COMPREHENSIVE ACCUMULATED COMPREHENSIVE SHARES, AT
SHARES CAPITAL COMPENSATION INCOME DEFICIT INCOME COST TOTAL
--------- --------- --------- --------- --------- ---------- ----------- ---------
Balance as of January 1, 2006 $ 6,810 $ 83,069 $ (198) $ 307 $ (27,895) $ (7,408) $ 54,685
Issuance of shares and options (net
of issuance expenses in the amount
of $ 1,333) 389 13,427 - - - - 13,816
Exercise of stock options related to
employees and directors 195 3,430 - - - - 3,625
Exercise of tradable options issued at
the secondary offering (see note 10b) 17 955 972
Cash dividend - - - - (9,997) - (9,997)
Reclassification of deferred stock
compensation due to implementation
of SFAS 123(R) - (198) 198 - - - -
Compensation related to options
granted to employees - 555 - - - - 555
Tax benefit related to exercise of
stock options - 446 - - - 446
Comprehensive income:
Realized gain on hedging derivatives - - - (307) - $ (307) - (307)
Unrealized gain on hedging
derivatives - - - 52 - 52 - 52
Unrealized gain on marketable
securities - - - 3 - 3 - 3
Net income - - - - 18,380 18,380 - 18,380
--------- --------- --------- --------- --------- ---------- ----------- ---------
Total comprehensive income $ 18,128
==========
Balance as of December 31, 2006 $ 7,411 $ 101,684 $ - $ 55 $ (19,512) $ (7,408) $ 82,230
========= ========= ========= ========= ========= =========== =========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED
FINANCIAL STATEMENTS.
F - 8
TEFRON LTD. AND ITS SUBSIDIARIES
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (CONT.)
- -------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS
CUMULATIVE
ADDITIONAL OTHER TOTAL TREASURY
ORDINARY PAID-IN COMPREHENSIVE ACCUMULATED COMPREHENSIVE SHARES, AT
SHARES CAPITAL INCOME DEFICIT INCOME COST TOTAL
-------- -------- -------- -------- -------- -------- --------
Balance as of January 1, 2007 $ 7,411 $101,684 $ 55 $(19,512) $ (7,408) $ 82,230
Exercise of stock options related to
employees and directors 5 87 - - - 92
Exercise of tradable options issued at the
secondary offering (see note 10b) 102 4,188 4,290
Compensation related to options granted to
employees - 571 - - - 571
Comprehensive income (loss):
Realized gain on hedging derivatives - - (52) - $ (52) - (52)
Realized gain on marketable securities - - (3) - (3) - (3)
Unrealized gain on hedging derivatives, net
of $ 165 tax - - 445 - 445 - 445
Unrealized loss on marketable securities - - (77) - (77) - (77)
Cumulative impact of change in accounting
for uncertainties in income taxes (FIN 48) - - - 557 - - 557
Net income - - - 483 483 - 483
-------- -------- -------- -------- -------- -------- --------
Total comprehensive income $ 796
========
Balance as of December 31, 2007 $ 7,518 $106,530 $ 368(*) $(18,472) $ (7,408) $ 88,536
======== ======== ======== ======== ======== ========
(*) Composed as follows:
Accumulated Unrealized gain on hedging derivative, net of taxes 445
Accumulated Unrealized loss on marketable securities (77)
--------
$ 368
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED
FINANCIAL STATEMENTS.
F - 9
TEFRON LTD. AND ITS SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS
YEAR ENDED DECEMBER 31,
---------------------------------------------
2007 2006 2005
----------- ----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 483 $ 18,380 $ 3,293
Adjustments to reconcile net income to net cash provided by
operating activities:
Loss (income) from discontinued operations - (120) 5,357
Depreciation of property, plant and equipment 8,567 8,719 9,686
Compensation related to options granted to employees 571 555 431
Increase (decrease) in severance pay, net 74 459 (588)
Increase in deferred taxes, net 79 3,098 4,670
Accrual of interest on short and long-term deposits (613) (100) -
Gain related to sale of marketable securities (134) (37) -
Interest and amortization of premium and accretion of discount of
marketable securities (189) (20) -
Gain on sale of property, plant and equipment (651) (73) (409)
Decrease (increase) in trade receivables, net 1,622 (4,677) (9,099)
Decrease (increase) in other accounts receivable and prepaid
expenses (919) (417) 884
Decrease (increase) in inventories (3,665) (2,530) 3,740
Increase (decrease) in trade payables (1,423) 3,278 793
Increase (decrease) in other accounts payable and accrued expenses (768) 748 (946)
----------- ----------- -----------
Net cash provided by continuing operating activities 3,034 27,263 17,812
Net cash provided by discontinued operating activities - 507 2,999
----------- ----------- -----------
Net cash provided by operating activities 3,034 27,770 20,811
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant and equipment (6,376) (4,688) (4,960)
Investment grants received - 1,218 452
Proceeds from sale of property, plant and equipment 943 335 475
Dividend received from discontinued operations - 140 484
Proceeds from sale of subsidiary, net - 9,917 -
Investment in marketable securities (18,974) (11,876) -
Proceeds from sale of marketable securities 17,240 6,961 -
Investment in short-term and long-term deposits (8,321) (11,018) -
Proceeds from repayment of deposits 12,989 - -
Proceeds from the Company's insurance policy for plant and machinery
damage - - 619
Earn out payments related to acquisition of Macro Clothing (b) - - (261)
----------- ----------- -----------
Net cash used in continuing investing activities (2,499) (9,011) (3,191)
Net cash used in discontinued investing activities - (172) (779)
----------- ----------- -----------
Net cash used in investing activities (2,499) (9,183) (3,970)
----------- ----------- -----------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED
FINANCIAL STATEMENTS.
F - 10
TEFRON LTD. AND ITS SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONT.)
- --------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS
YEAR ENDED DECEMBER 31,
------------------------------------
2007 2006 2005
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of long-term bank loans $ (5,948) $(21,188) $ (6,038)
Proceeds from long-term bank loans - 5,000 -
Payments under capital lease - - (206)
Decrease in short-term bank credit, net - (14,713) (3,642)
Tax benefit from exercise of stock options related to employees and
directors - 446 -
Proceeds from exercise of stock options related to employees and
directors 92 3,175 456
Exercise of tradable options issued at the secondary offering 4,290 972 -
Proceeds from secondary offering of shares and options, net - 13,816 -
Dividend paid to shareholders (551) (9,446) -
-------- -------- --------
Net cash used in continuing financing activities (2,117) (21,938) (9,430)
Net cash used in discontinued financing activities - (544) (2,768)
-------- -------- --------
Net cash used in financing activities (2,117) (22,482) (12,198)
-------- -------- --------
Increase (decrease) in cash and cash equivalents (1,582) (3,895) 4,643
Decrease in cash and cash equivalents attributed to discontinued
operations - 209 548
-------- -------- --------
Increase (decrease) in cash and cash equivalents attributed to
continuing operations (1,582) (3,686) 5,191
Cash and cash equivalents at beginning of year 3,966 7,652 2,461
-------- -------- --------
Cash and cash equivalents at end of year $ 2,384 $ 3,966 $ 7,652
======== ======== ========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED
FINANCIAL STATEMENTS.
F - 11
TEFRON LTD. AND ITS SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONT.)
- --------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS
YEAR ENDED DECEMBER 31,
-------------------------------------------------
2007 2006 2005
------------- ------------- -------------
(a) CASH PAID DURING THE YEAR FOR:
Interest $ 1,918 $ 2,504 $ 3,139
============= ============= =============
Income taxes, net of refunds received $ 450 $ 996 $ 204
============= ============= =============
(b) ACQUISITION OF MACRO CLOTHING:
Accrued payments $ - $ - $ (261)
============= ============= =============
(c) SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING
ACTIVITY:
Purchase of property, plant and equipment by credit, net
of investment grants receivable $ 109 $ 266 $ 1,418
============= ============= =============
Unsecured subordinated promissory note as a partial
consideration of the sale of Alba Health $ - $ 3,000 $ -
============= ============= =============
Net change in unrealized gain $ 313 $ 415 $ -
============= ============= =============
Cumulative impact of change in accounting for
uncertainties in income tax (FIN 48) $ 557 $ - $ -
============= ============= =============
Exercise of options in exchange for a bank loan $ - $ 450 $ -
============= ============= =============
Dividend declared in 2006 $ - $ 551 $ -
============= ============= =============
Deferred tax asset related to tax benefit derived from
exercise of options by employees $ - $ 446 $ -
============= ============= =============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED
FINANCIAL STATEMENTS.
F - 12
TEFRON LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS
NOTE 1:- GENERAL
a. Tefron Ltd, a company organized under the laws of the State of Israel
("the Company") and its subsidiaries are engaged in the design,
manufacture and sale of knitted intimate apparel, swimwear and active
wear, which are manufactured using two different techniques (seamless
and cut and sew) (see also Note 15). The Company's principal markets
are the United States and Europe.
The Company's subsidiaries are Hi-Tex, founded by the Company
("Hi-Tex"), which commenced operations in 1997, Tefron USA, Inc.,
Tefron U.K, El-Masira Textile Company Ltd. in Jordan and Macro
Clothing Ltd. ("Macro").
b. During 2005, 2006 and 2007, 76.9%, 77.4% and 74.1% from the revenues,
respectively, were derived from the sales to the three major
customers, all located in the United States. The Company's
arrangements with its customers do not contain minimum purchase
commitments and there can be no assurance that the principal customers
will continue to purchase the Company's products in the same volumes
or on the same terms as they have done in the past. A material
decrease of purchases made by the major customers or a material
adverse change in the terms of such purchases could have a material
adverse effect on the Company's results of operations and financial
position.
The Company is dependent on subcontractors who render services that
are integral part of the Company's manufacturing process. If such
subcontractors do not render the required services, the Company may
experience delays or additional costs to satisfy its production
requirements.
In particular, the Company dependent on a subcontractor who performs a
major part of the dyeing and finishing of the Company's seamless
manufacturing process and is also dependent on a subcontractor who
renders vertical manufacturing services for the Company's swimwear
product line
c. Discontinued operations:
The Company had a put option to sell its ownership interest in Alba
Health, one of its subsidiaries, to Alba Health. On December 22, 2005,
the Company delivered a notice of exercise to Alba Health and the
other parties to the put option agreement. On April 27, 2006, the
Company finalized the sale of its interest in Alba Health. Under the
terms of the transaction, the Company received an aggregate
consideration of approximately $ 13,000, consisting of approximately $
10,000 in cash and $ 3,000 pursuant to the terms of an unsecured
subordinated promissory note, the principal amount of which will be
due on August 31, 2009. The note bears annual interest at the rate of
LIBOR plus 3% payable quarterly, and the payment of the note will be
subordinated in favor of Alba Health's senior bank lenders. The
interest has been paid fully on a quarterly basis. The Company is in a
position that it is probable to receive the note in full. Since the
closing date of the sale, Alba Health business has been treated as a
discontinued operation in the Company's financial statements in the
years ended December 31, 2005 and 2006. This transaction was accounted
for in accordance with Statement of Financial Accounting Standard No.
144, "Accounting for the Impairment or Disposal of Long-Lived Assets"
("SFAS No. 144"), and EITF 03-13, "Applying the Conditions in
Paragraph 42 of FASB Statement No. 144 in Determining Whether to
Report Discontinued Operations".
F - 13
TEFRON LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS
NOTE 1:- GENERAL (CONT.)
c. Discontinued operations (cont.):
The results of operations including sales, cost of sales, operating
expenses, financial expenses, taxes on income and impairment and other
costs related to the exercise of the put option for the year ended
December 31, 2005, and for the period ended April 27, 2006, have been
reclassified in the accompanying statements of income and presented as
discontinued operations. The Company had previously reported its Alba
Health business as a separate segment (Healthcare USA) as required by
Statement of Financial Standards No. 131, "Disclosures About Segments
of an Enterprise and Related Information" ("SFAS No. 131"). Separate
financial information regarding Alba Health, which was accounted for
as discontinued operations as follows:
FOR THE PERIOD
FROM JANUARY 1, FOR THE YEAR
2006 THROUGH ENDED
APRIL 27, DECEMBER 31,
2006 2005
-------- --------
Sales $ 7,474 $ 34,249
Cost of sales 5,524 24,596
-------- --------
Gross profit 1,950 9,653
Selling and marketing expenses 1,076 4,542
General and administrative expenses 338 1,308
Impairment and other expenses related to the put option
exercise - 6,073
-------- --------
Operating income (loss) 536 (2,270)
Financial expenses, net 243 1,182
-------- --------
Income (loss) before taxes on income 293 (3,452)
Taxes on income 9 3,521
Minority interest in losses (earnings) of subsidiaries (164) 1,616
-------- --------
Net income (loss) $ 120 $ (5,357)
======== ========
F - 14
TEFRON LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES
The consolidated financial statements have been prepared in conformity with
accounting principles generally accepted in the United States of America
("U.S. GAAP"). The significant accounting policies followed in the
preparation of the financial statements, applied on a consistent basis,
are:
a. Use of estimates:
The preparation of financial statements in conformity with U.S.
generally accepted accounting principles requires management to make
estimates, judgments and assumptions. The Company's management
believes that the estimates, judgments and assumptions used are
reasonable based upon information available at the time they are made.
These estimates, judgments and assumptions can affect the reported
amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the dates of the financial statements, and the
reported amounts of revenue and expenses during the reporting period.
Actual results could differ from those estimates.
F - 15
TEFRON LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (CONT.)
b. Financial statements in U.S. dollars:
The accompanying consolidated financial statements have been prepared
in U.S. dollars, as the currency of the primary economic environment
in which the operations of the Company and its subsidiaries are
conducted is the U.S. dollar. The majority of sales is made in U.S.
dollars, and a significant portion of purchases of materials and
property, plant and equipment is denominated in U.S. dollars. Thus,
the functional and the reporting currency of the Company and its
subsidiaries is the U.S. dollar.
Accordingly, monetary accounts maintained in currencies other than the
dollar are remeasured into U.S. dollars in accordance with Statement
No. 52 of the Financial Accounting Standards Board ("FASB"), "Foreign
Currency Translation". All transactions gains and losses from the
remeasurement of monetary balance sheet items are reflected in the
statements of income as financial income or expenses as appropriate.
c. Principles of consolidation:
The consolidated financial statements include the accounts of the
Company and its subsidiaries. Intercompany balances and transactions
have been eliminated in consolidation.
d. Cash equivalents:
Cash equivalents are short-term highly liquid investments that are
readily convertible to cash with original maturities of three months
or less at acquisition.
f. Short-term deposits:
Short-term bank deposits have a maturity of more than three months but
less than one year. The deposits are in U.S. dollars and in NIS, and
bears an average interest of 4.85% and 4.61%, respectively. The
short-term deposits are presented at cost, including accrued interest.
g. Inventories:
Inventories are stated at the lower of cost or market value. Inventory
write-offs are provided to cover risks arising from slow-moving items,
discontinued products, and items with a market price that is lower
than cost. Cost is determined as follows:
Raw materials, accessories and packaging materials - using the "moving
average cost" method.
Work-in-progress, finished products and raw materials - using the
"moving average cost" method, based on standard costs which are
adjusted to actual costs.
F - 16
TEFRON LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (CONT.)
h. Marketable securities
The Company accounts for its investments in marketable securities in
accordance with SFAS No. 115, "Accounting for Certain Investments in
Debt and Equity Securities".
Management determines the appropriate classification of its
investments in marketable debt securities at the time of purchase and
reevaluates such determinations at each balance sheet date. The
Company classifies all of its securities as available for sale.
Available for sale securities are carried at fair value, with the
unrealized gains and losses reported in "accumulated other
comprehensive income", a separate component of shareholders' equity.
Realized gains and losses on sale of investments are included in the
consolidated income statements. Interest and amortization of premium
and accretion of discount on debt securities are recorded as financial
expenses. Following SEC Staff Accounting Bulletin No. 59, management
evaluates in each period whether declines in the market value of its
securities are other than temporary. Where such declines are
determined to be other than temporary, the related unrealized loss is
recorded as a write-down included in financial expenses.
i. Long-term deposit:
A long-term bank deposit is a deposit with a maturity of more than one
year. The long-term deposit is presented at cost, including accrued
interest.
j. Goodwill:
Goodwill attributable to Alba Health, a former subsidiary (see Note 1c
in reference to discontinued operations), is measured as the excess of
the cost of an acquired company over the total of the amounts assigned
to tangible and identifiable intangible assets acquired less
liabilities assumed. Goodwill is not amortized, but rather reviewed
for impairment at least annually in accordance with the provisions of
SFAS No. 142.
SFAS No.142 requires goodwill to be tested for impairment on adoption
and at least annually thereafter or between annual tests in certain
circumstances, and written down when impaired, rather than being
amortized as previous accounting standards required. Goodwill
attributable to each of the reporting units is tested for impairment
by comparing the fair value of each reporting unit with its carrying
value. The Company performed annual impairment test in 2005 resulted
in an impairment of $ 5,683 to the goodwill related to Alba Health, a
former subsidiary (see Note 1c). The Company does not have goodwill as
of 2007.
F - 17
TEFRON LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (CONT.)
k. Property, plant and equipment, net:
Property, plant and equipment are stated at cost, net of accumulated
depreciation and investment grants. Investment grants are recorded at
the time the Company is entitled to such grants. Depreciation is
calculated by the straight-line method over the estimated useful lives
of the assets at the following annual rates:
%
--------------------
Buildings 2.5
Machinery and equipment 7
Installations and leasehold improvements 5 - 33 (mainly 5%)
Furniture and office equipment 6 - 25 (mainly 6%)
Motor vehicles 15
Leasehold improvements are amortized over the term of the lease,
including reasonably assured renewal options, or the useful lives of
the assets, whichever is shorter.
l. Impairment of long-lived assets
The Company's long-lived assets are reviewed for impairment in
accordance with SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets" whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured
by a comparison of the carrying amount of an asset to the future
undiscounted cash flows expected to be generated by the assets. If
such assets are considered to be impaired, the impairment to be
recognized is measured by the amount by which the carrying amount of
the assets exceeds the fair value of the assets. Assets to be disposed
of by sale are reported at the lower of the carrying amount or fair
value less costs to sell. As of the years 2005, 2006 and 2007, no
impairment was identified.
m. Severance pay:
The Company's liability for severance pay in Israel is calculated
pursuant to Israel's Severance Pay Law based on the most recent salary
of the employees multiplied by the number of years of employment as of
the balance sheet date. Employees are entitled to one month's salary
for each year of employment or a portion thereof. The Company's
liability for all of its Israeli employees is fully provided by
monthly deposits with insurance policies, pension and severance pay
funds and by an accrual. The deposited funds include profits
accumulated up to the balance sheet date. The deposited funds may be
withdrawn only upon the fulfillment of the obligation pursuant to
Israel's Severance Pay Law or labor agreements. The value of the
deposited funds is based on the cash surrendered value of these funds.
Severance pay expenses amounted to $ 1,221, $ 1,505 and $ 1,375 for
the years ended December 31, 2005, 2006 and 2007, respectively.
F - 18
TEFRON LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (CONT.)
n. Revenue recognition:
Revenues from sales are recognized in accordance with Staff Accounting
Bulletin No. 104, "Revenue Recognition in Financial Statements" ("SAB
No. 104"), when delivery has occurred, persuasive evidence of an
agreement exists, the vendor's fee is fixed or determinable, no
further obligation exists and collectibility is probable.
o. Income taxes:
The Company and its subsidiaries account for income taxes in
accordance with Statement of Financial Accounting Standards No.109,
"Accounting for Income Taxes". This Statement prescribes the use of
the liability method whereby deferred tax assets and liability account
balances are determined based on the differences between the financial
reporting and tax bases of assets and liabilities and are measured
using the enacted tax rates and laws that will be in effect when the
differences are expected to reverse. The Company and its subsidiaries
provide a valuation allowance, if necessary, to reduce deferred tax
assets to their estimated realizable value.
Deferred tax liabilities and assets are classified as current or non
current based on the classification of the related asset or liability
for financial reporting, or according to the expected reversal dates
of the specific temporary differences if not related to an asset or
liability for financial reporting.
On January 1, 2007, the Company adopted FASB Interpretation No. 48,
"Accounting for Uncertainty in Income Taxes, an Interpretation of FASB
Statement No. 109" (FIN 48). FIN 48 contains a two-step approach to
recognizing and measuring uncertain tax positions accounted for in
accordance with SFAS No. 109. The first step is to evaluate the tax
position taken or expected to be taken in a tax return by determining
if the weight of available evidence indicates that it is more likely
than not that, on an evaluation of the technical merits, the tax
position will be sustained on audit, including resolution of any
related appeals or litigation processes. The second step is to measure
the tax benefit as the largest amount that is more than 50% likely to
be realized upon ultimate settlement. After adoption of FIN 48, the
Company accrues interest and penalties related to unrecognized tax
benefits to its provision for income tax.
As a result of the adopting of FIN 48, an amount of $ 557 was charged
to accumulated deficit as of January 1, 2007.
p. Accounting for stock-based compensation
On January 1, 2006, the Company adopted Statement of Financial
Accounting Standards No. 123 (revised 2004), "Share-Based Payment"
("SFAS 123R") which requires the measurement and recognition of
compensation expenses based on estimated fair values for all
share-based payment awards made to employees and directors. SFAS 123R
supersedes Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees" ("APB 25"), for periods beginning in fiscal
2006. SFAS 123R requires companies to estimate the fair value of
equity-based payment awards on the date of grant using an
option-pricing model. The value of the portion of the award that is
ultimately expected to vest is recognized as an expense over the
requisite service periods in the Company's consolidated income
statement.
F - 19
TEFRON LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (CONT.)
p. Accounting for stock-based compensation (cont.):
Prior to January 1, 2006, the Company has elected to follow
Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees" ("APB No. 25") and FASB Interpretation No.
44, "Accounting for Certain Transactions Involving Stock
Compensation" ("FIN 44") in accounting for its employee stock
option plans. Under APB No. 25, when the exercise price of the
Company's stock options is less than the market price of the
underlying shares on the date of grant, compensation expense is
recognized. No stock-based compensation cost was recognized in
the statement of operations for the year ended December 31, 2005,
as all options granted under those plans had an exercise price
equal to the market value of the underlying common stock on the
date of grant.
Prior to January 1, 2006, the Company adopted the disclosure
provisions of Statement of Financial Accounting Standards No.
148, "Accounting for Stock-Based Compensation - Transition and
Disclosure" ("SFAS No. 148"), which amended certain provisions of
Statement of Financial Accounting Standards No. 123, "Accounting
for Stock-Based Compensation" ("SFAS No. 123") to provide
alternative methods of transition for an entity that voluntarily
changes to the fair value based method of accounting for
stock-based employee compensation.
The Company adopted SFAS No. 123(R) using the modified
prospective transition method, which requires the application of
the accounting standard starting the first day of the Company's
fiscal year 2006. Under that transition method, compensation cost
recognized in the years ended December 31, 2006 and 2007,
includes: (a) compensation cost for all stock-based payments
granted prior to, but not yet vested as of January 1, 2006, based
on the grant date fair value estimated in accordance with the
original provisions of SFAS No. 123, and (b) compensation cost
for all stock-based payments granted or modified subsequent to
January 1, 2006, based on the grant-date fair value estimated in
accordance with the provisions of SFAS No. 123(R). Results for
prior periods have not been restated. The Company selected the
Black-Scholes option pricing model as the most appropriate fair
value method for its stock-options awards.
The Company recognizes compensation expenses for the value of its
awards granted subsequent to January 1, 2006 based on the
straight line method over the requisite service period of each of
the awards, net of estimated forfeitures. SFAS No. 123(R)
requires forfeitures to be estimated at the time of grant and
revised, if necessary, in subsequent periods if actual
forfeitures differ from those estimates. Estimated forfeitures
are based on actual historical pre-vesting forfeitures.
Forfeitures were previously accounted for as they occurred, but
have been estimated with the adoption of SFAS No. 123(R) for
those awards not yet vested
SFAS No. 123(R) requires the cash flows resulting from the tax
deductions in excess of the compensation costs recognized for
those stock options to be classified as financing cash flows. The
$ 446 excess tax benefit classified as financing cash inflows in
the year ended December 31, 2006 would have been classified as an
operating cash flow if the Company had not adopted SFAS No.
123(R).
F - 20
TEFRON LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (CONT.)
p. Accounting for stock-based compensation (cont.):
The following table sets forth the total stock-based compensation
expense resulting from stock options included in the consolidated
statements of operation:
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
2007 2006
---- ----
Cost of sales $ - $ 75
Selling and marketing expenses 60 48
General and administrative expenses 511 432
---- ----
Total stock-based compensation expense $571 $555
==== ====
In the year ended December 31, 2007, no stock options were granted,
but the CEO options were modified (See Note 10c). The fair value of
stock-based awards was estimated at the date of grant using the
Black-Scholes model with the following weighted-average assumptions
for the years ended December 31, 2005 and 2006:
2006 2005
------- ------
Risk-free interest rate 4.8% 4.4%
Expected dividend yield 0% 0%
Expected volatility 37% 37%
Expected lives (years) 4 3.5
The Company's computation of expected volatility for the years ended
December 31, 2006 and 2005 was based on its historical market-based
volatility. The computation of expected life was based on historical
exercise patterns. The interest rate for periods within the
contractual life of the award was based on the U.S. Treasury yield
curve in effect at the time of grant.
F - 21
TEFRON LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (CONT.)
p. Accounting for stock-based compensation (cont.):
The following table illustrates the pro forma effect on 2005 net
income and earnings per share, assuming that the Company had applied
the fair value recognition provision of SFAS No. 123 on its
stock-based employee compensation:
YEAR ENDED
DECEMBER 31,
---------
2005
---------
Net income from continuing operations, as reported $ 8,650
Add: Stock-based compensation expense included in the determination of net income
as reported 431
Deduct: Stock-based compensation expense related to employee stock options (888)
---------
Pro forma net income, including the effect of stock-based compensation expense
from continuing operations $ 8,193
Loss from discontinued operations, net of taxes $ (5,357)
---------
Pro forma net income, including effect of stock-based compensation expense $ 2,836
=========
Basic and diluted net earnings per share, as reported:
From continuing operations:
Basic net earnings per share $ 0.49
=========
Diluted net earnings per share $ 0.47
=========
From discontinued operations:
Basic net losses per share $ (0.30)
=========
Diluted net losses per share $ (0.29)
=========
From total operations:
Basic net earnings per share $ 0.19
=========
Diluted net earnings per share $ 0.18
=========
Basic and diluted net earnings (losses) per share, including the effect of
stock-based compensation expenses:
From continuing operations:
Basic net earnings per share $ 0.46
=========
Diluted net earnings per share $ 0.44
=========
From discontinued operations:
Basic net losses per share $ (0.30)
=========
Diluted net losses per share $ (0.29)
=========
From total operations:
Basic net earnings per share $ 0.16
=========
Diluted net earnings per share $ 0.15
=========
F - 22
TEFRON LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (CONT.)
q. Fair value of financial instruments:
The following methods and assumptions were used by the Company in
estimating its fair value disclosures for financial instruments:
1. The carrying amount of cash and cash equivalents, bank deposits,
trade receivables and trade payables approximates their fair
values due to the short-term maturities of these instruments.
2. The fair value of marketable securities with quoted market prices
is based on quoted market prices.
3. For marketable securities without current market price, fair
values are estimated using values obtained from the Company's
asset manager. To estimate the value of these investments the
asset manager employs various models that take into consideration
such factors, among others, as the credit rating of the issuer,
effective maturity of the security, yields on comparably rated
publicly traded securities, availability of insurance , risk-free
yield curves and type of collateral. The actual value at which
such securities could actually be sold or settled with a willing
buyer or seller may differ from such estimated fair values
depending on a number of factors including, but not limited to,
current and future economic conditions, the quantity sold or
settled, the presence of an active market and the availability of
a willing buyer or seller.
4. The carrying amount of the subordinate note approximates its fair
value due to the interest this note bears.
r. Basic and diluted earnings (losses) per share:
Basic earnings (losses) per share are computed based on the weighted
average number of Ordinary shares outstanding during the year. Diluted
earnings (losses) per share are computed based on the weighted average
number of Ordinary shares outstanding during the year, plus dilutive
potential Ordinary shares considered outstanding during the year, in
accordance with SFAS No. 128, "Earnings per Share".
s. Concentrations of credit risk:
Financial instruments that potentially subject the Company and its
subsidiaries to concentrations of credit risk consist principally of
cash and cash equivalents, bank deposits, marketable securities and
trade receivables.
Cash and cash equivalents are invested mainly in U.S. dollars with
major banks in Israel. Accordingly, the Company's management believes
that minimal credit risk exists with respect to cash and cash
equivalents.
The Company's marketable securities consist of investment in U.S.
corporate debts securities and Israeli government securities. The
Company's investment policy, approved by the Investment Committee,
limits the amount the Company may invest in any one type of investment
or issuer, thereby reducing credit risk concentrations.
Trade receivables are derived from sales to major customers located
primarily in the U.S. The allowance for doubtful accounts comprises
specific accounts the collectibility of which, based upon management's
estimate, is doubtful. The doubtful account expenses (income) for the
years ended December 31, 2005, 2006 and 2007, were $ 181, $ (6) and $
37, respectively.
F - 23
TEFRON LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (CONT.)
t. Derivatives and hedging:
The Company accounts for derivatives and hedging based on Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS No. 133"). SFAS No. 133
requires the Company to recognize all derivatives on the balance sheet
at fair value. If the derivative meets the definition of a cash flow
hedge and is so designated, changes in the fair value of derivatives
will either be offset against the change in fair value of the hedged
assets, liabilities, or firm commitments through earnings, or
recognized in other comprehensive income until the hedged item is
recognized in earnings. The ineffective portion of a derivative's
change in fair value is recognized in earnings depending on the
exposure being hedged. During 2005, 2006 and 2007, there were no gains
or losses recognized in earnings for hedge ineffectiveness.
The Company entered into forward transactions and use the "cylinder
strategy" (purchasing puts options on the U.S. dollar, usually
together with writing call options on the U.S. dollar at a higher
exchange rate) in order to hedge the variability of anticipated
expenses and balances denominated in new Israeli shekels ("NIS") and
of revenues denominated in Euro, both due to changes of the U.S.
dollar against the NIS and Euro as applicable. The net profits
(losses) that resulted from these contracts and were recognized in
earnings during 2005, 2006 and 2007 were $ (145), $ 1,765 and $ 1,404
respectively.
As of December 31, 2007, unrealized gains on hedging derivative
instruments amounted to $ 445. This unrealized gain is included in
accumulated other comprehensive income.
u. Comprehensive Income:
The Company accounts for comprehensive income in accordance with SFAS
No. 130, "Reporting Comprehensive Income". This statement establishes
standards for the reporting and display of comprehensive income and
its components in a full set of general purpose financial statements.
Comprehensive income generally represents all changes in stockholders'
equity during the period except those resulting from investments by,
or distributions to, stockholders. The Company determined that its
items of other comprehensive income relates to gain and loss on
hedging derivative instruments and unrealized gains and losses on
available for sale securities.
v. Impact of recently issued accounting standards:
In September 2006, the Financial Accounting Standards Board ("FASB")
issued SFAS No. 157, "Fair Value Measurements" ("SFAS No. 157"). This
Standard defines fair value, establishes a framework for measuring
fair value in generally accepted accounting principles and expands
disclosures about fair value measurements. The provisions of SFAS No.
157 are effective for the Company beginning January 1, 2008. The FASB
issued a FASB Staff Position (FSP) to defer the effective date of SFAS
No. 157 for one year for all nonfinancial assets and nonfinancial
liabilities, except for those items that are recognized or disclosed
at fair value in the financial statements on a recurring basis. The
Company does not believe the adoption of SFAS No. 157 will have
material impact on its consolidated financial statements
F - 24
TEFRON LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (CONT.)
v. Impact of recently issued accounting standards:
In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option
for Financial Assets and Financial Liabilities" ("SFAS No. 159"). SFAS
No. 159 permits companies to choose to measure certain financial
instruments and certain other items at fair value. The standard
requires that unrealized gains and losses on items for which the fair
value option has been elected be reported in earnings. The provisions
of SFAS No. 159 are effective for the Company beginning January 1,
2008. The Company does not believe the adoption of SFAS No. 159 will
have an impact on its consolidated financial statements.
In December 2007, the FASB issued SFAS No. 141 (revised 2007),
"Business Combinations" ("SFAS 141R"). SFAS 141R establishes
principles and requirements for how an acquirer recognizes and
measures in its financial statements the identifiable assets acquired,
the liabilities assumed, any non controlling interest in the acquiree
and the goodwill acquired. SFAS 141R also establishes disclosure
requirements to enable the evaluation of the nature and financial
effects of the business combination. SFAS 141R is effective for fiscal
years beginning after December 15, 2008. Earlier adoption is
prohibited. The Company is currently assessing the potential impact
that the adoption of SFAS 141 could have on its financial statements.
In December 2007, the FASB issued SFAS No. 160, "Noncontrolling
Interests in Consolidated Financial Statements, an amendment of ARB
No. 51". SFAS No. 160 establishes accounting and reporting standards
that require that the ownership interests in subsidiaries held by
parties other than the parent be clearly identified, labeled, and
presented in the consolidated statement of financial position within
equity, but separate from the parent's equity; the amount of
consolidated net income attributable to the parent and to the
noncontrolling interest be clearly identified and presented on the
face of the consolidated statement of income; and changes in a
parent's ownership interest while the parent retains its controlling
financial interest in its subsidiary be accounted for consistently.
SFAS No. 160 is effective for fiscal years, and interim periods within
those fiscal years, beginning on or after December 15, 2008. The
Company is currently assessing the potential impact that the adoption
of SFAS 160 could have on its financial statements.
NOTE 3:- MARKETABLE SECURITIES
Marketable securities with contractual maturities of less than one year are
as follows:
DECEMBER 31,
-------------------------------------------------------------------------------
2007 2006
------------------------------------- -----------------------------------
GROSS GROSS
AMORTIZED UNREALIZED AMORTIZED UNREALIZED
COST LOSSES FAIR VALUE COST GAINS FAIR VALUE
------- ------- ------- ------- ------- -------
U.S. corporate debts
securities $ - $ - $ - $ 1,994 $ - $ 1,994
Israeli government
securities 2,092 (2) 2,090 1,028 3 1,031
------- ------- ------- ------- ------- -------
$ 2,092 $ (2) $ 2,090 $ 3,022 $ 3 $ 3,025
======= ======= ======= ======= ======= =======
F - 25
TEFRON LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS
NOTE 3:- MARKETABLE SECURITIES (CONT.)
Marketable securities with contractual maturities after one year are as
follows:
DECEMBER 31,
-------------------------------------------------------------------------------
2007 2006
------------------------------------- -----------------------------------
GROSS GROSS
AMORTIZED UNREALIZED AMORTIZED UNREALIZED
COST GAINS(LOSSES) FAIR VALUE COST GAINS FAIR VALUE
------- ------- ------- ------- ------- -------
U.S. corporate debts
securities $ 3,537 $ 41 $ 3,578 $ 950 $ - $ 950
Auction rate
securities(*) 1,400 (116) 1,284 1,000 - 1,000
------- ------- ------- ------- ------- -------
$ 4,937 $ (75) $ 4,862 $ 1,950 $ - $ 1,950
======= ======= ======= ======= ======= =======
The unrealized losses on the Company's investments in Israeli government
securities are due primarily to interest rate fluctuations. As of December
31, 2007 no unrealized losses are outstanding over 12 month period. The
unrealized losses on the Company's investments in Auction rate securities
are due primarily to uncertainties in the capital markets regarding these
securities since the Company has the ability and intent to hold these
investments until a recovery of fair value, which may be until maturity.
The Company does not consider these investments to be
other-than-temporarily impaired as of December 31, 2007.
(*) The effective maturity may differ from the contractual maturities, due
to the periodical auction mechanism. The balance is comprised from two
auction rate securities, which suffer from failed auctions since
September 2007. For determining the effective maturity dates for these
securities, the Company used its asset managers' valuation analysis.
The analysis was made as to the projected source of capital that each
of the issuers will be able to obtain in order to pay back its debt
holders.
NOTE 4:- OTHER ACCOUNTS RECEIVABLE AND PREPAID EXPENSES
DECEMBER 31,
-------------------
2007 2006
------ ------
Government authorities: $1,204 $ 996
Government participation in extraordinary expenses
due to the war - 710
Deferred income taxes (see Note 13h) 464 459
Advances to suppliers 1,375 793
Prepaid expenses 742 484
Hedging derivatives 940 122
Other 679 602
------ ------
$5,404 $4,166
====== ======
F - 26
TEFRON LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS
NOTE 5:- INVENTORIES
DECEMBER 31,
---------------------
2007 2006
------- -------
Raw materials, accessories and packaging materials $12,108 $12,832
Work-in progress 14,137 10,632
Finished products 6,332 5,448
------- -------
$32,577 $28,912
======= =======
In the years ended December 31, 2005, 2006 and 2007, the Company recorded
inventory write-offs in the amount of $ 660, $ 815 and $ 1,260
respectively. These write-offs were recorded as cost of sales
NOTE 6:- PROPERTY, PLANT AND EQUIPMENT, NET
Composition of assets grouped by major classifications, are as follows:
DECEMBER 31,
--------------------------
2007 2006
--------- ---------
Cost:
Buildings $ 3,865 $ 3,566
Machinery and equipment 181,275 178,682
Installation and leasehold improvements 7,550 5,943
Motor vehicles 446 446
Furniture and office equipment 2,340 2,683
Investment grants (33,217) (33,217)
--------- ---------
162,259 158,103
--------- ---------
Accumulated depreciation:
Buildings 642 529
Machinery and equipment 104,002 95,528
Installation and leasehold improvements 4,251 4,071
Motor vehicles 423 407
Furniture and office equipment 1,382 1,624
Investment grants (23,232) (21,142)
--------- ---------
87,468 81,017
--------- ---------
Depreciated cost $ 74,791 $ 77,086
========= =========
(1) Depreciation expenses for the years ended December 31, 2005, 2006 and
2007 were $ 9,686, $ 8,719 and $ 8,567, respectively.
(2) As for liens, see Note 9.
F - 27
TEFRON LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS
NOTE 7:- OTHER ACCOUNTS PAYABLE AND ACCRUED EXPENSES
DECEMBER 31
---------------------
2007 2006
------- -------
Employees and payroll accruals $ 3,608 $ 3,407
Accrued expenses 1,092 2,800
Equipment suppliers 1,171 1,062
Tax payable 2,280 3,133
Other 484 -
------- -------
$ 8,635 $10,402
======= =======
NOTE 8:- LONG-TERM LOANS
a. Composition:
WEIGHTED AVERAGE
INTEREST RATE
-------------------------
DECEMBER 31, DECEMBER 31,
------------------------- ------------------------
2007 2006 2007 2006
--------- --------- --------- ---------
%
-------------------------
Loans in U.S. dollars:
Banks (variable interest LIBOR
plus 1.2%-2.0%) 6.5 - 6.9 5.9 - 6.9 $19,322 $25,270
Less - current maturities:
Loans from banks and others 5,948 5,948
------- -------
$13,374 $19,322
======= =======
b. The loans as of December 31, 2007 mature as follows: (*)
DECEMBER 31,
2008 (current maturities) $ 5,948
2009 5,544
2010 2,749
2011 2,749
2012 2,332
-------
$19,322
=======
Upon the closing of the Share Purchase Agreement with the investor
controlled by FIMI (see Note 10), the Company entered into new
financing arrangements with its bank creditors. The new financing
arrangements contain different financial covenants and ratios from
those in the Company's previous bank loan agreements. As of December
31, 2007, the Company met those covenant criteria.
During 2008, the Company entered into a better financing arrangement
with its bank creditors, which was not anticipated as of December 31,
2007. The annual interest rate was reduced to three-month LIBOR plus
1.0%. Additionally, the company converted loans at the principal
amount of $6.0 million held at its U.S banks with new loans received
from its Israeli banks and payable in seventeen quarterly installments
commencing June 30, 2008 through June 29, 2012.
(*) In accordance with the new arrangement mentioned above with the
banks, the annual installments of the loans would be $3,807,
$4,159, $4,158, $ 4,158 and $3,040 in the years 2008, 2009, 2101,
2011 and 2012, respectively
c. As for collateral, see Note 9.
F - 28
TEFRON LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS
NOTE 9:- LIENS, CONTINGENCIES AND COMMITMENTS
a. All bank debt is collateralized by a floating charge (a continuing
charge on the Company's present and future assets but permitting the
Company to dispose of such assets in the ordinary course of business)
on all of the assets of the Company and its subsidiaries.
b. In accordance with the provisions of the Law for the Encouragement of
Capital Investments, 1959, the Company and its subsidiaries in Israel
received grants from the State of Israel in respect of investments in
their plants. The conditions in the letters of approval extending the
grants from the State of Israel primarily include, among others, the
requirements that the investments be made according to the approved
plan and that at least 30% of the investments be financed by
outstanding share capital. Non-fulfillment of these conditions would
require the refund of the grants to be linked to the Consumer Price
Index in Israel from the date of receipt plus interest. To guarantee
fulfillment of the conditions for receipt of the grants, the Company
and its subsidiaries have recorded floating charges on all of their
assets in favor of the State of Israel.
c. The facilities of the Company and most of its Israeli subsidiaries are
located in buildings leased for various periods ending between 2009
and 2024, including renewal options.
The aggregate minimum rental commitments under non-cancelable leases,
based on the above agreements as of December 31, 2007, are as follows:
2008 $ 3,108
2009 2,772
2010 2,609
2011 2,611
2012 and thereafter 439
-------
$11,539
=======
Rental expenses for the years ended December 31, 2005, 2006 and 2007,
amounted to $ 3,345, $ 3,186 and $ 2,985, respectively.
d. Legal proceedings:
A former employee of the Company has filed lawsuits against the
Company and three of its former or current officers, with the Israeli
District Court and the Israeli Labor Law Court, seeking damages in the
amount of approximately $ 2,000 plus non-specified bodily damages, in
connection with damages allegedly incurred by him as a result of his
imprisonment in Egypt. The matter is at a preliminary stage and the
Company's management believes that the claim is without merit and
remit and should be dismissed, and thus no accrual was made in the
financial statements.
Except as provided above, there are no material pending legal
proceedings, other than litigation incidental in the ordinary course
of business to which the Company or any of its subsidiaries are
subject.
F - 29
TEFRON LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA
NOTE 10:- SHAREHOLDERS' EQUITY
a. On April 22, 2004, the transactions pursuant to the Share Purchase
Agreement with a partnership controlled by FIMI Opportunity Fund
("FIMI") and pursuant to the Share Purchase Agreement with Leber
Partners, L.P., a limited partnership ("the Investor") were closed.
Under the agreements, the Company issued 3.53 million and 1.07 million
Ordinary shares of the Company to FIMI and the Investor, respectively,
at a price per share of $ 4.25 and $ 4.65 ("the PPS"), respectively,
for a total cash consideration of $ 15,000 and $ 5,000, respectively.
The number of shares received may be adjusted, based on a certain
formula set forth in the agreement which determines the adjusted price
per share ("adjusted PPS").
The agreements included two instruments: shares and a conditional
obligation that is freestanding of the shares and can be settled in
shares at the Company's discretion. Therefore the conditional
obligation is a liability and not equity since the value of the payout
is based on the performance condition and not based on the shares. As
a result, the conditional obligation was measured at fair value on
transaction date and on each balance sheet date. The difference
between the initial values assigned to the liability component and the
final payout was charged to the statement of operations.
On March 31, 2005, the Company signed an amendment to the Share
Purchase Agreement with its investors approved by the Company's Board
of Director's on that date. Accordingly, on April 7, 2005, the Company
issued 863,378 Ordinary shares with respect to the conditional
obligation in the amount of $ 3,454 pursuant to a purchase price
adjustment mechanism based on the Company's 2004 EBITDA.
b. On December 27, 2005, Tefron published a prospectus in Israel in
connection with a proposed underwritten secondary offering to the
public in Israel of either Ordinary shares or a combination of
Ordinary shares and options exercisable into Ordinary shares. The
publication of the prospectus was approved by the Israeli Securities
Authority and by the Tel-Aviv Stock Exchange. The offering was made
only by Tefron, and not by any selling shareholder. As a result of the
offering completed on January 10, 2006, the Company raised a net
amount of $ 13,816 composed of a combination of 1,800,000 Ordinary
shares and 600,000 options to purchase the Company's Ordinary shares
at an exercise price of $ 9.49 (denominated in NIS and subject to
dividend adjustments). The options were exercisable until January 9,
2007. 142,263 of these options were exercised in 2006 and 430,485
options were exercised during January 2007 for a total consideration
of $972 and $4,290 in 2006 and 2007, respectively. As of December 31,
2007 all the options were either exercised or expired.
c. Stock options:
In September 1997, the Company's Board of Directors adopted a Share
Option Plan in which 1,166,049 Ordinary shares were reserved for
issuance to directors, officers and employees of the Company. At
general meetings of shareholders in August 1999, July 2001 and March
2004, it was resolved to increase the number of shares reserved for
issuance under the Share Option Plan by 600,000, 500,000 and 446,274
Ordinary shares, respectively. The options vest over a period of three
to four years and expire after 10 years from the grant date or upon
termination of employment. The Share Option Plan expired in September,
2007.
F - 30
TEFRON LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA
NOTE 10:- SHAREHOLDERS' EQUITY (CONT.)
c. Stock options (cont.):
On April 22, 2004, upon the completion of the Purchase Agreement
described in a. above, the Company granted the Company's CEO 650,000
options ("the Options"), which may be exercised to purchase up to
650,000 Ordinary shares of the Company, at an exercise price of $ 4.25
per share. The Options vest over four years commencing January 1, 2004
and expire 10 years from the date of the grant. The market price of
the Company's shares on the date of grant was $ 5.85. Accordingly, the
Company recorded compensation expenses of $ 303 and $ 142 in 2005 and
2006, respectively, using the acceleration method according to FIN 28,
"Accounting for Stock Appreciation Rights and Other Variable Stock
Option or Award Plans an interpretation of APB Opinions No. 15 and 25"
("FIN 28"). This expense was presented under general and
administrative expenses.
The option agreement contains a provision providing for a reduction to
the exercise price of the options in the event of a dividend
distribution in amount equal to dividends paid per share. This
provision applies to options which, at the time of the dividend
distribution, could not be exercised, whether due to the fact that the
options are not vested or due to the terms of Section 102 of the
Israel Income Tax Ordinance. The Company's Shareholders approved in
the third quarter of 2007, an amendment to the Option Agreement so
that the adjustment to the exercise price due to dividends would apply
until October 22, 2008, to all 650,000 options, whether or not the
options are exercisable at the time a dividend distribution is made,
for dividends paid by the Company until October 22, 2008. This
approval had retroactive effect from October 2006. As a result of this
amendment, the Company recorded additional compensation expense in its
financial statements of 2007 in the amount of $ 262,000.
On August 9, 2005, the Company granted to one of its officers 40,000
options, at an exercise price of $ 5.8 per share, to be vested over
four years. The market price of the Company's shares on the date of
grant was $ 6.23.
Except for these options, all other options are granted with an
exercise price equal to the market value at the date of grant. The
weighted average fair values of the options granted during 2005 and
2006 were $ 2.2 and $ 3.7, respectively. No options were granted
during 2007.
As of December 31, 2007, 441,175 options were available for future
grants under the aforementioned plan.
F - 31
TEFRON LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA
NOTE 10:- SHAREHOLDERS' EQUITY (CONT.)
c. Stock options (cont.):
A summary of the Company's share option activity under the plan is as
follows:
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------------
2007 2006 2005
----------------------- ----------------------- ------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
NUMBER EXERCISE NUMBER EXERCISE NUMBER EXERCISE
OF OPTIONS PRICE OF OPTIONS PRICE OF OPTIONS PRICE
---------- ---------- ---------- ---------- ---------- ----------
Options outstanding
at beginning of
year 1,830,875 $ 5.24 2,477,054 $ 4.70 2,422,805 $ 4.48
Changes during the
year:
Granted - $ - 80,000 $ 10.13 210,000 $ 6.34
Forfeited or
canceled (411,512) $ 5.03 (6,250) $ 3.50 (23,000) $ 4.16
Exercised (22,333) $ 4.28 (719,929) $ 3.93 (132,751) $ 3.72
---------- ---------- ----------
Options outstanding
at end of year 1,397,030 $ 5.09 1,830,875 $ 5.24 2,477,054 $ 4.70
========== ========== ========== ========== ========== ==========
Options exercisable
at the end of the
year 1,232,030 $ 4.79 1,417,542 $ 5.02 1,911,388 $ 4.70
========== ========== ========== ========== ========== ==========
The following table summarizes significant ranges of outstanding and
exercisable options as of December 31, 2007:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------- ---------------------------------
WEIGHTED-
AVERAGE WEIGHTED- WEIGHTED-
REMAINING AVERAGE AVERAGE
RANGE OF CONTRACTUAL EXERCISE AGGREGATE EXERCISE AGGREGATE
EXERCISE NUMBER OF LIFE PRICE PER INTRINSIC NUMBER OF PRICE PER INTRINSIC
PRICES OPTIONS (IN YEARS) SHARE VALUE OPTIONS SHARE VALUE
- ---------- --------- ---------- ---------- --------- --------- ---------- ---------
$ $ $
- ---------- ---------- ----------
3.50-4.31 999,530 4.85 3.69 $ 1,249 999,530 3.69 $ 1,249
5.34-5.37 110,000 7.56 5.34 - 35,000 5.34 -
7.14 60,000 7.83 7.14 - 30,000 7.14 -
8.13-8.52 128,500 1.34 8.25 - 98,500 8.25 -
11.27 40,000 8.33 11.27 - 10,000 11.27 -
15.00 59,000 2.46 15.00 - 59,000 15.00 -
--------- --------- --------- ---------
1,397,030 4.91 5.09 $ 1,249 1,232,030 4.79 $ 1,249
========= ========== ========== ========= ========= ========== =========
The aggregate intrinsic value in the table above represents the total
intrinsic value (i.e., the difference between the Company's closing
stock price on the last trading day of the year of fiscal 2007 and the
exercise price, times the number of shares) that would have been
received by the option holders had all option holders exercised their
options on December 31, 2007. This amount changes based on the fair
market value of the Company's share. Total intrinsic value of options
exercised is $ 116 for the year ended December 31, 2007. Total fair
value of options vested is $ 576 for the year ended December 31, 2007.
As of December 31, 2007, $ 262 of total unrecognized compensation cost
related to stock options is expected to be recognized over an
approximate weighted-average period of 0.9 year.
F - 32
TEFRON LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS
NOTE 10:- SHAREHOLDERS' EQUITY (CONT.)
d. Dividend distribution:
On August 8, 2006 and on November 7, 2006, the Company's Board of
Directors declared a dividend of $ 5,000 each, payable to shareholders
on record as of August 31, 2006 and as of November 30, 2006,
respectively, out of earnings that are not attributable to an
"Approved Enterprise" (see Note 13d). The dividends were paid on
September 14, 2006 and on December 14, 2006, respectively. The
dividend distributed from income attributable to sources other than
the "Approved Enterprise" programs.
NOTE 11:- SUPPLEMENTARY INFORMATION TO STATEMENTS OF OPERATIONS
a. Cost of sales:
YEAR ENDED DECEMBER 31,
------------------------------------------
2007 2006 2005
--------- --------- ---------
Materials $ 75,694 $ 76,031 $ 74,568
Salaries and related expenses 24,778 23,310 26,414
Subcontracting costs 16,254 18,785 11,337
Other production costs 18,866 17,971 17,730
Depreciation 7,944 7,934 8,751
Decrease (increase) in work-in progress and
finished products (4,389) 1,113 2,821
--------- --------- ---------
$ 139,147 $ 145,144 $ 141,621
========= ========= =========
b. Financial expenses, net:
YEAR ENDED DECEMBER 31,
-------------------------------------
2007 2006 2005
------- ------- -------
Income:
Interest income on bank deposits and others $(1,297) $ (837) $ -
Exchange rate differences, net - - (1,057)
Profit from forward exchange transactions (157) (365) -
Gain related to sale of marketable
securities (135) (37) -
------- ------- -------
Total income (1,589) (1,239) (1,057)
------- ------- -------
Expenses:
Interest on long-term loans 1,574 2,245 2,777
Interest on short-term loans 183 42 533
Interest on tax assessment - - 300
Exchange rate differences, net 593 538 -
Bank expenses and other, net 528 326 491
Loss from forward exchange transactions - - 145
------- ------- -------
Total expenses 2,878 3,151 4,246
------- ------- -------
Financial expenses, net $ 1,289 $ 1,912 $ 3,189
======= ======= =======
F - 33
TEFRON LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS
NOTE 12:- DEFERRED TAX LIABILITIES
DECEMBER 31
---------------------
2007 2006
------- -------
Deferred taxes (see note 13h) $12,247 $12,163
Tax liability 150 150
------- -------
$12,397 $12,313
======= =======
NOTE 13:- TAXES ON INCOME
a. The Company adopted the provisions of FASB Interpretation No. 48,
Accounting for Uncertainty in Income Taxes, on January 1, 2007. As a
result of the implementation of Interpretation 48, the Company
recognized approximately a $ 557 decrease in unrecognized tax
benefits, which was accounted for as decrease to the January 1, 2007
balance of accumulated deficit.
In accordance with the Company's accounting policy, after adoption of
FIN 48, interest expense and potential penalties related to income
taxes are included in the tax expense line of the Company's condensed
consolidated statements of operations.
As of December 31, 2007 and 2006 the Company had accrued interest
liability related to uncertain tax positions in the amounts of $ 96
and $ 0, respectively, which is included within income tax accrual on
the balance sheet.
The Company and its subsidiaries file income tax returns in the U.S.
federal jurisdiction, and various states in the U.S. and Israel
jurisdiction. Tefron Ltd., Hi-Tex and Macro (the Israeli Companies)
may be subject to examination by the Israel tax authorities for fiscal
years 2001 through 2006. Tefron USA (the U.S. subsidiary) may be
subject to examination by the U.S. Internal Revenue Service ("IRS").
El-Masira files income tax returns to the tax authorities in Jordan.
The Company believes that it has adequately provided for any
reasonably foreseeable outcomes related to tax audits and settlement.
The final tax outcome of our tax audits could be different from that
which is reflected in the Company's income tax provisions and
accruals. Such differences could have a material effect on the
Company's income tax provision and net income in the period in which
such determination is made.
b. Reduction in corporate tax rate:
On July 25, 2005, the Knesset (Israeli Parliament) passed the Law for
the Amendment of the Income Tax Ordinance (No. 147), 2005, which
prescribes, among others, a gradual decrease in the corporate tax rate
in Israel to the following tax rates: in 2007 - 29%, in 2008 - 27%, in
2009 - 26% and in 2010 and thereafter - 25%.
c. Applicable tax laws:
The Company and its subsidiaries in Israel are "industrial companies"
in conformity with the Law for the Encouragement of Industry (Taxes)
1969. The principal benefits to which the companies are entitled under
this Law are accelerated rates of depreciation, consolidated tax
returns and a deduction for tax purposes, over a three year period, of
costs incurred in issuance of shares.
F - 34
TEFRON LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS
NOTE 13:- TAXES ON INCOME (CONT.)
d. Tax benefits under the Law for the Encouragement of Capital
Investments, 1959 ("the Law"):
Certain production facilities in Israel have been granted the status
of "Approved Enterprise" under the Law, for several investment
programs ("the Programs").
In accordance with the Law, the Company and certain subsidiaries in
Israel received grants from the State of Israel in respect of
investments in their plants. The conditions in the letters of approval
extending the grants from the State of Israel primarily include the
requirements that the investments be made according to the approved
plan and that at least 30% of the investments be financed by
outstanding share capital. In addition, income attributed to certain
Programs is tax exempt for a period of two years and is subject to a
reduced corporate tax rate of 10% - 25% for an additional period of
five to eight years, based on the percentage of foreign investment in
the Company.
The duration of tax benefits for each of the Programs is subject to
limitations of the earlier of 12 years from commencement of
investment, or 14 years from receipt of approval, as an "Approved
Enterprise" under the Law.
Tax-exempt income attributable to the "Approved Enterprise" cannot be
distributed to shareholders without subjecting the Company to taxes
except upon complete liquidation of the Company. If such retained
tax-exempt income is distributed in a manner other than upon the
complete liquidation of the Company, it would be taxed at the reduced
corporate tax rate applicable to such profits (between 10%-25%). The
Company does not intend to distribute any amounts of its undistributed
tax-exempt income as a dividend. The Company intends to reinvest its
tax-exempt income and not to distribute such income as a dividend. No
deferred income taxes have been provided on income attributable to the
Company's Approved Enterprise programs as the undistributed tax exempt
income is essentially permanent in duration.
The entitlement to the above benefits is conditional upon the
Company's fulfilling the conditions stipulated by the Law, regulations
published thereunder and the certificates of approval for the specific
investments in approved enterprises.
Should the Company and its subsidiaries in Israel fail to meet such
requirements in the future, income attributable to its "Approved
Enterprise" programs could be subject to the statutory Israeli regular
corporate tax rate and the Company could be required to refund a
portion of the tax benefits already received, with respect to such
programs. Income from sources other than the "Approved Enterprise" is
subject to tax at regular Israeli corporate tax rate.
F - 35
TEFRON LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS
NOTE 13:- TAXES ON INCOME (CONT.)
d. Tax benefits under the Law for the Encouragement of Capital
Investments, 1959 ("the Law") (cont.):
On April 1, 2005, an amendment to the Investment Law came into effect
("the Amendment") and has significantly changed the provisions of the
Investment Law. The Amendment limits the scope of enterprises which
may be approved by the Investment Center by setting criteria for the
approval of a facility as a Beneficiary Enterprise, such as provisions
generally requiring that at least 25% of the Beneficiary Enterprise's
income will be derived from export. Additionally, the Amendment
enacted major changes in the manner in which tax benefits are awarded
under the Investment Law so that companies no longer require
Investment Center approval in order to qualify for tax benefits.
However, the Investment Law provides that terms and benefits included
in any certificate of approval already granted will remain subject to
the provisions of the law as they were on the date of such approval.
Therefore, the Israeli companies with Approved Enterprise status will
generally not be subject to the provisions of the Amendment. As a
result of the amendment, tax-exempt income generated under the
provisions of the new law, will subject the Company to taxes upon
distribution or liquidation and the Company may be required to record
deferred tax liability with respect to such tax-exempt income. As of
December 31, 2007, the Company did not generate income subject to the
provision of the new law.
e. Taxes on income (tax benefit) included in the statements of
operations:
YEAR ENDED DECEMBER 31,
------------------------------------
2007 2006 2005
------- ------- -------
Current taxes $ - $ 3,583 $ 422
Deferred taxes (86) 2,128 3,666
Taxes in respect of prior years 66 - 209
------- ------- -------
$ (20) $ 5,711 $ 4,297
======= ======= =======
Domestic $ 10 $ 5,603 $ 4,190
Foreign (30) 108 107
------- ------- -------
$ (20) $ 5,711 $ 4,297
======= ======= =======
F - 36
TEFRON LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS
NOTE 13:- TAXES ON INCOME (CONT.)
f. Effective tax:
Reconciliation between the theoretical tax expense, assuming all
income is taxed at the statutory tax rate applicable to income of the
Company and the actual tax expense as reported in the statement of
operations is as follows:
YEAR ENDED DECEMBER 31,
------------------------------------------
2007 2006 2005
-------- -------- --------
Income before taxes, as reported in the
consolidated statements of income $ 463 $ 23,971 $ 12,947
======== ======== ========
Statutory tax rate 29% 31% 34%
======== ======== ========
Taxes calculated at the Israeli statutory tax
rate $ 134 $ 7,431 $ 4,402
Decrease in taxes resulting from "Approved
Enterprise" benefits - (1,581) (1,297)
Deferred taxes on losses and temporary
differences for which valuation allowance was
provided - - 736
Nondeductible expenses 105 124 181
Taxes in respect of prior years (66) (125) 209
Other (193) (138) 66
-------- -------- --------
Actual tax expenses $ (20) $ 5,711 $ 4,297
======== ======== ========
g. Income (loss) before taxes on income is comprised as follows:
YEAR ENDED DECEMBER 31,
---------------------------------------
2007 2006 2005
-------- -------- --------
Israel $ 230 $ 24,243 $ 14,410
Foreign 233 (272) (1,463)
-------- -------- --------
Total $ 463 $ 23,971 $ 12,947
======== ======== ========
F - 37
TEFRON LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS
NOTE 13:- TAXES ON INCOME (CONT.)
h. Deferred taxes:
Deferred income taxes reflect the net tax effect of temporary
differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax
purposes. Significant components of the Company's deferred tax
liabilities and assets are as follows:
DECEMBER 31,
------------------------
2007 2006
-------- --------
Asset (liability) in respect of:
Property, plant and equipment $(12,895) $(12,799)
Allowances and provisions 743 887
Net operating loss carry-forward 369 208
Tefron USA deferred taxes 4,579 4,819
-------- --------
Deferred tax liability before valuation allowance (7,204) (6,885)
Valuation allowance (4,579) (4,819)
-------- --------
Net deferred tax liability $(11,783) $(11,704)
======== ========
Presented in balance sheet:
Long-term liability $(12,247) $(12,163)
Short-term assets 464 459
-------- --------
Net deferred tax liability $(11,783) $(11,704)
======== ========
Domestic $(11,783) $(11,704)
Foreign - -
-------- --------
Net deferred tax $(11,783) $(11,704)
======== ========
(1) The deferred taxes are computed based on enacted tax rates
expected to apply at the time of reversal (average rate of 25.7
%).
In assessing the realization of deferred tax assets, management
considers whether it is more likely than not that the deferred tax
assets will not be realized. The ultimate realization of the deferred
tax assets is dependent upon the generation of future taxable income
during the periods in which temporary differences are deductible and
net operating losses are utilized.
The Israeli subsidiaries have available carryfoward tax loss of $369
to offset against future tax profits.
The subsidiary in the U.S. has provided valuation allowances in
respect of deferred tax assets resulting from net operating loss
carry-forwards. The net change in the valuation allowance was $(240).
i. Final tax assessments:
The Company and Hi-Tex, one of the Company's Israeli subsidiaries,
received final tax assessments through 2001.
F - 38
TEFRON LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS
NOTE 14:- EARNINGS (LOSS) PER SHARE
The following table sets forth the computation of basic and diluted net
earnings (losses) per share ("EPS"):
YEAR ENDED DECEMBER 31,
----------------------------------------------------------
2007 2006 2005
--------------- --------------- --------------
Income from continuing operations $ 483 $ 18,260 $ 8,650
=============== =============== ==============
Income (loss) from discontinued operations - 120 (5,357)
--------------- --------------- --------------
Net income $ 483 $ 18,380 $ 3,293
=============== =============== ==============
Weighted average Ordinary shares outstanding -
Basic EPS $ 21,188,161 $ 20,210,722 $ 17,719,275
Dilutive effect:
Employee and directors stock options 441,963 543,844 823,343
--------------- --------------- --------------
Weighted average Ordinary shares outstanding -
Diluted EPS 21,630,124 20,754,566 18,542,618
=============== =============== ==============
Basic and diluted net earnings per share from
continuing operations:
Basic net earnings per share $ 0.02 $ 0.90 $ 0.49
=============== =============== ==============
Diluted net earnings per share $ 0.02 $ 0.88 $ 0.47
=============== =============== ==============
Basic and diluted net earnings (losses) per share
from discontinued operations:
Basic net earnings (losses) per share $ - $ 0.01 $ (0.30)
=============== =============== ==============
Diluted net earnings (losses) per share $ - $ 0.01 $ (0.29)
=============== =============== ==============
Basic and diluted net earnings per share:
Basic net earnings per share $ 0.02 $ 0.91 $ 0.19
=============== =============== ==============
Diluted net earnings per share $ 0.02 $ 0.89 $ 0.18
=============== =============== ==============
The total weighted average number of outstanding options excluded from the
calculation of diluted earnings per share, since they would have an
anti-dilutive effect, was 169,000 and 227,500 for the year ended December
31, 2006 and 2007, respectively.
F - 39
TEFRON LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS
NOTE 15:- SEGMENT REPORTING
a. General information:
The Company has two production lines: knitted apparel ("Cut & Sew")
and seamless apparel ("Seamless"). Unlike the Cut & Sew process, the
Seamless process includes the utilization of a single machine that
transforms yarn directly into a nearly complete garment.
The Company has two reportable segments:
- Intimate apparel and active wear manufactured using the Seamless
process.
- Intimate apparel, active wear and swim wear manufactured using
the Cut & Sew process, mainly performed in Israel and Jordan and
through the purchase of finished products in China and Cambodia.
The accounting policies of the reportable segments are the same as
those described in Note 2. Selling and marketing, general and
administrative expenses are allocated according to management's
assessment. Management evaluates performance based upon operating
income (loss) before interest and income taxes.
b. Reportable segments:
YEAR ENDED DECEMBER 31, 2007
------------------------------------------
CUT & SEW SEAMLESS CONSOLIDATED
---------- ----------- -------
Sales to unaffiliated customers $ 77,020 $ 81,594 $158,614
========== =========== ========
Operating income (loss) $ 2,269 $ (517) $ 1,752
========== ===========
Financial expenses, net 1,289
--------
Income before taxes on income $ 463
========
Depreciation and amortization $ 1,848 $ 6,719 $ 8,567
========== =========== ========
Identifiable and total assets at
December 31, 2007 $ 43,470 $ 92,931 $136,401
========== ===========
Corporate assets 26,091
--------
Total assets $162,492
========
F - 40
TEFRON LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS
NOTE 15:- SEGMENT REPORTING (CONT.)
b. Reportable segments (cont.):
YEAR ENDED DECEMBER 31, 2006
----------------------------------------------
CUT & SEW SEAMLESS CONSOLIDATED
----------- ----------- -----------
Sales to unaffiliated customers $ 85,951 $ 102,153 $ 188,104
=========== =========== ===========
Operating income $ 9,517 $ 16,366 $ 25,883
=========== ===========
Financial expenses, net 1,912
-----------
Income before taxes on income $ 23,971
===========
Depreciation and amortization $ 2,170 $ 6,549 $ 8,719
=========== =========== ===========
Identifiable and total assets at
December 31, 2006 $ 33,986 $ 102,667 $ 136,653
=========== ===========
Assets attributed to discontinued operations -
Corporate assets 28,003
-----------
Total assets $ 164,656
===========
YEAR ENDED DECEMBER 31, 2005
-------------------------------------------
CUT & SEW SEAMLESS CONSOLIDATED
---------- ----------- --------
Sales to unaffiliated customers $ 61,454 $ 109,882 $171,336
========== =========== ========
Operating income $ 2,877 $ 13,259 $ 16,136
========== ===========
Financial expenses, net 3,189
--------
Income before taxes on income $ 12,947
========
Depreciation and amortization $ 3,082 $ 6,604 $ 9,686
========== =========== ========
Identifiable and total assets at
December 31, 2005 $ 37,697 $ 95,522 $133,219
========== ===========
Assets attributed to discontinued operations 40,053
Corporate assets 13,242
--------
Total assets $186,514
========
F - 41
TEFRON LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS
NOTE 15:- SEGMENT REPORTING (CONT.)
c. The Company's sales by geographic area are as follows:
YEAR ENDED DECEMBER 31,
--------------------------------------
2007 2006 2005
-------- -------- --------
North America $132,521 $145,205 $153,984
Europe 18,314 34,050 11,074
Israel 4,374 4,906 3,865
Other 3,405 3,943 2,413
-------- -------- --------
$158,614 $188,104 $171,336
======== ======== ========
d. Sales to major customers:
YEAR ENDED DECEMBER 31,
--------------------------
2007 2006 2005
---- ---- ----
%
--------------------------
A 39.1 38.6 40.3
B 23.6 28.8 25.8
C 11.4 10.0 10.8
---- ---- ----
74.1 77.4 76.9
==== ==== ====
As of December 31, 2006 and 2007, major customer's balances were $
18,575 and $ 17,103, respectively.
e. The Company's long-lived assets by geographic area are as follows:
DECEMBER 31,
---------------------
2007 2006
------- -------
Israel $67,037 $70,337
North America 4,797 5,310
Other countries 2,957 1,439
------- -------
$74,791 $77,086
======= =======
f. Revenues are generated by the following product lines:
YEAR ENDED DECEMBER 31,
--------------------------------------
2007 2006 2005
-------- -------- --------
Intimate apparel $ 89,877 $100,890 $101,625
Active wear 42,047 59,406 51,961
Swimwear 26,690 27,808 17,750
-------- -------- --------
$158,614 $188,104 $171,336
======== ======== ========
F - 42
TEFRON LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS
NOTE 16:- RELATED PARTIES
Transactions with related parties (shareholders and companies controlled by
shareholders):
YEAR ENDED DECEMBER 31,
------------------------------------
2007 2006 2005
------- ------- -------
Sales to related parties (1) $ - $ 12 $ 24
======= ======= =======
Cost of sales (2) (3) $(1,198) $(2,574) $(2,832)
======= ======= =======
Selling and marketing, general and administrative
expenses (2) $ (190) $ (240) $ (387)
======= ======= =======
(1) Related parties trade receivables in 2006 and 2007 were $ 10 and $ 3,
respectively.
(2) Related parties trade payables in 2006 and 2007 were $ 43 and $ 43,
respectively.
(3) Including primarily rental payments to a company controlled by
shareholders until April 17, 2007.
F - 43
[McGladrey & Pullen Logo]
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors
AlbaHealth, LLC
Valdese, North Carolina
We have audited the accompanying balance sheets of AlbaHealth, LLC (the
"Company") as of December 31, 2005 and 2004, and the related statements of
operations, members' equity and cash flows for the years then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of AlbaHealth, LLC as of December
31, 2005 and 2004, and the results of its operations and its cash flows for the
years then ended, in conformity with United States generally accepted accounting
principles.
/s/ McGladrey & Pullen, LLP
Charlotte, North Carolina
February 2, 2006
F - 44
SIGNATURES
The Company hereby certifies that it meets all of the requirements for
filing on Form 20-F and that it has duly caused and authorized the undersigned
to sign this annual report on its behalf.
TEFRON LTD.
By: /s/ Yosef Shiran
-----------------------
Yosef Shiran
Chief Executive Officer
By: /s/ Asaf Alperovitz
-----------------------
Asaf Alperovitz
Chief Financial Officer
March 27, 2008
EXHIBIT INDEX
1.1. Memorandum of Association of the Company (incorporated by
reference to Exhibit 3.1 to the Company's Registration Statement
on Form F-1 (No. 333-7538) filed on August 29, 1997).
1.2. Amended and Restated Articles of Association of the Company
(incorporated by reference to Exhibit 2.1 to the Company's Annual
Report on Form 20-F for the fiscal year ended December 31, 2006)
1.3. Amendment to Amended and Restated Articles of Association.
2.1. Form of Credit Agreement, dated as of December 13, 1999, among
AWS Acquisition Corp., Israel Discount Bank of New York and Bank
Hapoalim B.M., New York Branch as Administrative Agent
(incorporated by reference to Exhibit 99(b)(2) to Amendment No. 2
to Schedule 14D-1 in respect of Alba-Waldensian, Inc. filed by
the Company on December 13, 1999).
2.2 Letter, dated March 2, 2004, from Israel Discount Bank Ltd. to
the Company regarding shareholders' equity requirements under the
Credit Agreement (incorporated by reference to Exhibit 2.8 to the
Company's Annual Report on Form 20-F for the fiscal year ended
December 31, 2003).
2.3 Letter, dated March 2, 2004, from Bank Hapoalim to the Company
regarding shareholders' equity requirements under the Credit
Agreement (incorporated by reference to Exhibit 2.9 to the
Company's Annual Report on Form 20-F for the fiscal year ended
December 31, 2003).
2.4 Letter, dated February 16, 2004, from Israel Discount Bank to the
Company regarding revised repayment schedule and revised
shareholders' equity requirements under the Credit Agreement
(incorporated by reference to Exhibit 2.10 to the Company's
Annual Report on Form 20-F for the fiscal year ended December 31,
2003).
2.5 Letter, dated February 15, 2004, from Bank Hapoalim to the
Company regarding revised repayment schedule under the Credit
Agreement (incorporated by reference to Exhibit 2.11 to the
Company's Annual Report on Form 20-F for the fiscal year ended
December 31, 2003).
2.6 Letter, dated March 31, 2004, from Bank Hapoalim to the Company
regarding revised shareholders' equity requirements under the
Credit Agreement (incorporated by reference to Exhibit 2.12 to
the Company's Annual Report on Form 20-F for the fiscal year
ended December 31, 2003).
2.7 Sixth Amendment to Credit Agreement, dated December 15, 2004,
among Alba-Waldensian, Inc. and Bank Hapoalim, as Agent and
Lender, together with Term B Notes (incorporated by reference to
Exhibit 2.7 to the Company's Annual Report on Form 20-F for the
fiscal year ended December 31, 2004).
2.8 Loan Agreement, dated as of December 21, 2004, between Israel
Discount Bank and Hi-Tex Founded by Tefron Ltd (incorporated by
reference to Exhibit 2.12 to the Company's Annual Report on Form
20-F for the fiscal year ended December 31, 2004).
2.9 Loan Agreement, dated as of December 31, 2004, between Bank
Hapoalim and Hi-Tex Founded by Tefron Ltd (incorporated by
reference to Exhibit 2.13 to the Company's Annual Report on Form
20-F for the fiscal year ended December 31, 2004).
2.10 Loan Agreement, dated as of December 25, 2004, between Israel
Discount Bank and the Company (incorporated by reference to
Exhibit 2.14 to the Company's Annual Report on Form 20-F for the
fiscal year ended December 31, 2004).
2.11 Loan Agreement, dated as of December 31, 2004, between Bank
Hapoalim and the Company (incorporated by reference to Exhibit
2.15 to the Company's Annual Report on Form 20-F for the fiscal
year ended December 31, 2004).
4.1 Management and Services Agreement, effective as of July 30, 2003,
between the Company, Yosef Shiran and Shiran & Partners -
Consulting, Entrepreneurship, and Financing (incorporated by
reference to Exhibit 4.4 to the Company's Annual Report on Form
20-F for the fiscal year ended December 31, 2003).
4.2 Letter, dated March 28, 2007, from General Counsel of Company to
Mr. Yosef Shiran re: amendments to Management and Services
Agreement (incorporated by reference to Exhibit 4.4 to the
Company's Annual Report on Form 20-F for the fiscal year ended
December 31, 2006).
4.3 Lease Agreement dated as of August 12, 1997, between the Company
and New Net Assets (1994) Ltd. and an Assignment Agreement dated
as of December 25, 1998 between the Company and Hi-Tex Founded by
Tefron Ltd. The Company and/or its subsidiary, Hi-Tex Founded by
Tefron Ltd., have entered in to similar lease agreements with New
Net Assets (1994) Ltd. (incorporated by reference to Exhibit 4.5
to the Company's Annual Report on Form 20-F for the fiscal year
ended December 31, 2001).
4.4 Membership Interest Redemption Agreement, dated April 26, 2006,
by and between AlbaHealth, LLC and Tefron USA, Inc. (incorporated
by reference to Exhibit 4.6 to the Company's Annual Report
on Form 20-F for the fiscal year ended December 31, 2006).
4.5 Subordination Agreement, dated April 26, 2006, by Tefron USA,
Inc. in favor of Suntrust Bank, in its capacity as administrative
agent for the lenders from time to time party to the Senior
Credit Agreement. (incorporated by reference to Exhibit 4.7 to
the Company's Annual Report on Form 20-F for the fiscal year
ended December 31, 2006)
4.6 Unsecured Subordinated Promissory Note in the principal amount of
US $3 million, dated April 26, 2006, by AlbaHealth LLC. in favor
of Tefron USA, Inc. (incorporated by reference to Exhibit 4.8
to the Company's Annual Report on Form 20-F for the fiscal
year ended December 31, 2006)
4.7 Share Purchase Agreement dated February 17, 2004, by and between
the Company and Norfet Limited Partnership, including related
Registration Rights Agreement attached as a schedule
(incorporated by reference to Exhibit 4.9 to the Company's Annual
Report on Form 20-F for the fiscal year ended December 31, 2003).
4.8 Amendment to Purchase Agreement, dated March 31, 2005, by and
between the Company and Norfet Limited Partnership (incorporated
by reference to Exhibit 4.11 to the Company's Annual Report on
Form 20-F for the fiscal year ended December 31, 2004).
4.9 Share Purchase Agreement, made as of March 3, 2004, by and
between Tefron and Leber Partners, L.P, including related
Registration Rights Agreement attached as a schedule
(incorporated by reference to Exhibit 4.10 to the Company's
Annual Report on Form 20-F for the fiscal year ended December 31,
2003).
4.10 Agreement, dated as of July 5, 2006, between Macpell Industries
Ltd. and the Company regarding the lease of properties
(incorporated by reference to Exhibit 4.15 to the Company's
Annual Report on Form 20-F for the fiscal year ended December
31, 2006).
4.11 Joint Venture Agreement, dated as of May 8, 2006, by and between
the Company, Langsha Knitting Co. Ltd. and Itochu Textile
Materials (Asia) Ltd. (incorporated by reference to Exhibit
4.16 to the Company's Annual Report on Form 20-F for the
fiscal year ended December 31, 2006)
8.1 List of subsidiaries of the Company. (incorporated by reference
to Exhibit 8.1 to the Company's Annual Report on Form 20-F for
the fiscal year ended December 31, 2006)
12.(a).1 Certification by CEO pursuant to Rule 13a-14(a) or Rule 15d-14(a)
of the Securities Exchange Act of 1934, as adopted pursuant to
Section 302 of the Sarbanes Oxley Act of 2002.
12.(a).2 Certification by CFO pursuant to Rule 13a-14(a) or Rule 15d-14(a)
of the Securities Exchange Act of 1934, as adopted pursuant to
Section 302 of the Sarbanes Oxley Act of 2002.
13.(a).1 Certification of CEO and CFO pursuant to 18 U.S.C. Section 1350,
as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
14.(a).1 Consent of Kost, Forer Gabbay & Kasierer, a member of Ernst &
Young Global.
14.(a).2 Consent of McGladrey & Pullen, LLP.
